Has China’s property bubble already burst?

Recent research by Nomura and UBS seems to suggest the Chinese property market is in more trouble than originally thought. The downturn will be triggered by a massive oversupply of housing and a shortage of developer financing, which could see China's GDP growth fall to less than 6 per cent this year.

“To us, it is no longer a question of ‘if’ but rather ‘how severe’ the property market correction will be,” three of the Japan-based bank’s analysts say in a recent report. “We are convinced the property sector has passed a turning point.”

The property sector in China has powered ahead for years on the back of rapid credit expansion. The bubble is of such scale Nomura does not think there is much the government can do to stop the collapse.

“There is no policy that is universally right,” said analyst Zhiwei Zhang.

Property investment turned negative in four of China's 26 provinces in the first quarter of 2014, Nomura points out, and, in two of them, Heilongjiang and Jilin, the fall was greater than 25 per cent. It notes this could happen in other provinces.

UBS analyst Wang Tao, who is often see as relatively bullish on China, believes the property sector poses the biggest downside risk to the economy, and says she is increasingly worried about a property downturn in China.

'Slowdown expected'

“To some extent, the visible slowdown of property activity in recent months was expected after a strong rebound in the second half of 2012 and 2013.

“However, property supply has been growing faster than underlying demand, while investment demand for housing is being eroded and inventories are building up. We think a more persistent and sharper downturn in the property sector is the biggest risk for China’s economy in the next couple of years,” she said.

UBS’ sensitivity analysis suggests a 10 percentage point drop in the growth of construction volume would result in a 2.5 percentage point drop in GDP growth.

In addition to property developers, heavy industries such as metals, construction materials, and construction machinery would be affected the most.

Mortgage lending

The impact on mortgage lending is expected to be limited, as Chinese home buyers are not as highly leveraged as they were in the West in 2008. But the financial sector could be hit by worsening balance sheets of developers, corporates, and loans collateralised by property and land.

As far as the rest of the world is concerned, commodity exporters and some regional economies with large exposure to China’s domestic demand would be most affected by a property downturn. Commodity prices and currencies would likely react negatively also.