China has mortgage issues, not a property bubble

In practice, asset price bubbles are usually identified only with the benefit of hindsight. Very often we can label a crisis event only after it happens. This is also true for the property market.

"The bottom line is the odds for a prolonged property slump [in China] are low."
Raymond Yeung, Chief Economist, Greater China, ANZ

In ANZ Research’s view, a cyclical upturn in property prices is not a sign of a real-estate bubble. Using Japan’s experience in the 1990s, and more recently the US in the lead up to the GFC, it seems to be more pragmatic to relate a prolonged slump in a property market to a persistent deflationary expectation – a state wherein local residents no longer expect a pickup in price.

Recent PPI inflation indicates China’s deflationary risk has substantially diminished. In fact, we expect PPI inflation to return to positive territory by the end of this year after experiencing more than four years of negative rates.

ANZ Research’s estimation suggests China’s inventory reduction process will be complete by the end of 2017 when the turnover cycle returns to 2.1 years, a level last seen in 2010 - the year of the last property boom.

LOANS

Still, it’s worth keeping an eye on the financial risks arising from the rapid increase in new mortgage loans, which rose by 112 per cent year on year in the first half of 2016. Mortgage loans represented 47 per cent of total new loans in the second quarter.

In addition, property sales in the top five provinces out of 31 (Guangdong, Jiangsu, Zhejiang, Shandong, and Shanghai) accounted for 44 per cent of China’s national total, compared with 41 per cent a year ago.

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Since mortgage loans have accumulated within such a short space of time in several provinces, this increases both the inter-temporal and geographic concentration risk of banks’ mortgage loan books.

More local governments will likely implement property tightening measures. The People’s Bank of China is also likely to adopt macroprudential rules to manage real estate lending loan growth.

Against the backdrop of supply side structural reform, the central bank is expected to refrain from deploying conventional easing tools (like RRR) in order to avoid sending the wrong signal to the property market.  Instead, monetary policy will be focused on maintaining stability in the money market via open market operations.

Raymond Yeung is Chief Economist Greater China at ANZ