China's housing market not to crash: history revisited

There is no shortage of prophets predicting doom for China's housing market, but the history of recent property bubbles gives precious little to support their creed.

There is no doubt that China's home market is losing steam. Growth in home prices slowed to a near one-year low. Investment, construction and sales have all slowed.

All this might be seen as adding weight to predictions that China will fall into the same old trap that caught the United States, Japan and Hong Kong. All three have seen property bubbles burst in the past couple of decades.

A closer look at the three cases might make cause those doom mongers to think again.

Housing bust, American style

It's no mystery. The housing bubble and bust in the US was a direct result of easy credit and loose government supervision of financial derivatives. Simple.

The bubble officially burst in 2006 and the housing market is still on the mend. Between 1995 and 2006, house prices nearly doubled. In 1999, The Department of Housing and Urban Development announced action to provide $2.4 trillion in mortgages for affordable housing. The Federal Reserve lowered federal funds from 6.5 percent in late 2000 to 1 percent in 2003, at a time when the housing supply was increasing rapidly.

And so housing boomed until 2006. Rates had moved back up to 5.25 percent which hit demand and increased monthly mortgage payments bringing a sharp correction: the subprime crisis. Prices tumbled about 33 percent between 2007 and 2010.

China's housing market bears some similarities to the US as the bubble was expanding. Average prices have more than doubled since 2003: in Beijing and Shanghai more than quadrupled.

The surge began when the government made the property sector a pillar industry in 2003. After 2008, the credit boom, a government response to the global economic crisis, brought more investment and yet higher prices.

Despite the similarities, there are differences that will keep China free from bust American style: favorable demographic change, home upgrades, households' strong balance sheets, limited investment alternatives, strong income growth, and urbanization, according to Barclays at least. Beyond that, the Chinese government closely monitors and sometimes intervenes in the housing market.

Residential mortgage as a share of GDP, is an interesting way of quantifying the respective Chinese and US bubbles. Residential mortgages in China were less than 20 percent of GDP in 2012, while in the US in 2006, mortgages accounted for more than 80 percent of GDP, according to the Federal Reserve Bank of St. Louis.

Japan, land of the rising house price

When Japan's real estate industry collapsed in 1991, the result was a financial crisis and decades of recession. Triggered by the appreciation of the yen and excess expansion in the housing sector, the case is frequently compared with China.

Economic conditions including housing demand and exchange rate changes in China bear no similarities to Japan 30 years ago. China's real estate market is unlikely to follow the same track.

Japan's demand for new homes had already started to shrink when the bubble burst: The process of urbanization, a major driver of asset prices, was approaching its end.

Japan's urbanization rate had remained at around 75 percent since 1975. China is just gathering steam for its urbanization drive with rate of 53.7 percent in 2013. That rate, lower than most developed nations, indicates a genuine need to house 15 million newly arrived urbanites each year. Urbanization in China will continue, for sure, with the rate to reach 60 percent by the end of 2020: strong housing demand.

Japan's real estate bubble could also be attributed to the sharp appreciation of the yen, which had appreciated by over five percent annually since 1985, hitting a record high of 79 yen equal to one US dollar in 1995 from 235 against US dollars ten years before. Hot money poured in and asset prices soared. In six major Japanese cities, the price of commercial land rose by over 300 percent in the 1985-1991 period; false prosperity accelerating the burst of the bubble.

Appreciation of the yuan has remained moderate since 2005, up by around 36 percent at the end of last year. China's prudent monetary policy has kept the risk at the lowest level.

In addition, Japan's annual economic growth averaged at around four percent from 1985 to 1991, much lower than the 7.7 percent in China.

Hong Kong-style bubble and bust

China's housing market is also unlikely to follow the Hong Kong route, caused by almost insane speculative buying and the crushing effect of the Asian financial crisis.

In the years leading up to 1997 when the bubble burst, a large majority of homes were sold to speculators. About 55 percent of existing home purchases were speculative and for forward housing, the percentage was about 70 percent, according to research by Huang Xingwen,a veteran expert on the real estate sector at Beijing Normal University.

Although China's home market is also fraught with speculative buying, it's nothing like the situation in Hong Kong. There is no official statistic on the matter, but real estate insiders reckon the percentage to be far lower.

Wang Bao, a Beijing branch manager at agents HomeLink, estimated the percentage to be at about 20 to 30 percent, or perhaps even lower, the result of a government squeeze on speculation.

The burst of the bubble in Hong Kong coincided with the Asian financial crisis, which hammered the stock market and foreign exchange market, sending the housing market into a tailspin which was out of the control of the authorities. China's housing market is not faced with any such financial crisis, neither regional nor global, at least not in the near future.