Of late, a number of commentators have been drumming up the theory of a property bubble in China and, more importantly, the pending burst of the bubble. One article, on these pages, talked about the self-fulfilling cycle where Chinese banks' lending money against collateral propels the property price rise, which in turn increases the value of the bank's collateral, leading to even more lending.
If one looks at the ratio of housing prices to average income, there is no doubt that property in major Chinese cities is very expensive. Even in absolute value terms, places like Beijing and Shanghai are now in the league of the world's most expensive cities. Whether one calls it a bubble or not really doesn't matter. What is important is whether we are going to see a precipitous price decline in the near term - a bust following a boom, or a bubble bursting. So, will that happen in China within the next two years or so?
Let's look first at the technical side. Seasoned investors in the stock market know that the bear's turn is around the corner when even barbers are talking about share price increases. That is just market psychology. Conversely, when everyone is talking about a sharp price drop, do you really expect it is going to happen any time soon?
That is what is happening to China's property market. Ever since the Chinese government's battle with property prices began towards the end of 2009, people have known that the big boom is about to run out of steam. Over the past 18 months, the government has introduced one measure after another to dampen demand. Yet prices in major cities, at least in prime locations, have remained relatively stable, even amid a growing sense of consumer pessimism. Applying the same logic as in the stock market, it just doesn't look to me like a bubble is about to burst when everyone is waiting for a sharp price decline while the market remains firm. A bust is supposed to happen amid a maniac buying spree, when prices shoot up.
There are market fundamentals that explain why a bubble-burst scenario is not likely to happen in China. First, of course, is the real underlying demand - the world's biggest urbanisation process is currently taking place. China's urban population is still less than half its total. And it may take another decade to reach the 60 per cent level that is comparable to industrialised countries. That will create a lot of housing demand in cities, especially in regional metropolises like Beijing and Shanghai.
