Blue Point Trading Market View – June 29, 2012
China housing bubble popping? A property index tracking annual change in China’s property prices shows a steep downward trend in year-on-year percentage change – now reaching levels not seen since the height of the global financial crisis. Cash-strapped Chinese developers have been reluctant to buy land after government curbs introduced since 2010 to prevent a property bubble tightened credit, draining liquidity. China’s home values fell in a record 54 of 70 cities tracked by the government in May as developers cut prices to boost sales.
The point is, housing has been a huge driver of growth, and even a modest housing slowdown matters — it can’t just be brushed aside as though it were of minimal consequence for the broader Chinese economy. Real estate accounts for 10-13% of GDP. A flat to negative China housing market could shave another 1% off an the all ready slowing GDP growth curve. The health of the property sector is particularly important in China because of the pervasive role that land values play in underwriting lending. If this turns negative, banks will need to respond by slowing even more lending and get into a negative growth spiral. The tip of an iceberg?
I am believing more this story could get even bigger than the European story. Economies that rely on unsustainable growth curve inevitably are exposed to booms and crashes. Why would we think any different about China. I don’t have to tell you what this could mean to western markets if this should happen.