Build it and they will come. That is the philosophy underpinning modern China’s urban fields of dreams.
In some senses they have, and do, come. But they are not residents or businesses in many of China’s gleaming new towers. They are investors — speculators betting that property values only go up as China’s population moves indefinitely in just one direction, from country to city.
It’s been a good bet for a long time, but analysts warn, like all good things, one day it must come to an end.
According to a recent analysis from Citi’s China economics team, that day is coming, but not for a while.
“We remain cautious on sustainability of positive GDP contribution by China’s property sector in the medium to long-term, though quite optimistic over its near-term outlook,” they wrote in a research note earlier this month.
The reason for the long-term concern? The number of empty properties in a country already renowned for its ghost cities is still rising.
“Property vacancy remains an Achilles heel of China’s property market sustainability,” Citi noted.
With an estimated 21.4 per cent dwellings vacant at the end of 2017, China now has as much as 6.4 billion square metres of empty residential floor space.
That is 1.68 times the amount of floor space built over the past five years, and hints at the scale of construction downturn needed to allow the excess supply to be filled with residents.
To give you a better sense of the scale of China’s overbuilding, assuming a reasonably generous average of 80sqm of floorspace per new dwelling, that is 80 million units that are currently sitting empty.
Even relative to China’s population of 1.4 billion, 80 million is a lot of empty homes — more than any other country Citi looked at, except for the recession-ravaged economies of Spain and Italy.
“The high vacancy ratio suggests that future property investment is bound to decline, as the property market may have entered into a state of oversupply, and as the motivation for property purchases has increasingly become investment driven,” Citi warned.
Unlike Spain and Italy, though, purchaser demand for urban residential property in China remains high for now, as illustrated by eye-watering price-to-income ratios that make expensive cities like Sydney and Vancouver look cheap.
Despite the market imbalances, Citi does not expect China’s towering property debts to come crashing down this year.
“In the first quarter, property investment surprised on the upside; the prices of new homes in tier one, two and three cities continued to rise; and Citi expects property sales volume to pick up again after a prolonged downturn, largely on renewed impetus on urbanisation push and rebounding credit to households,” the analysts wrote.
US tariff setback may extend property boom
Somewhat ironically, Donald Trump’s decision to increase tariffs on Chinese exports to the US may result in this improvement in China’s property market continuing.
HSBC’s economics team estimates that the tariffs now in place will take up to half-a-percentage-point off Chinese economic growth over the next year, while the extension of tariffs to the remaining $US300 billion-plus of China’s exports into the US could take up to 1.2 percentage points from growth.
However, the bank’s analysts believe Chinese authorities won’t take this economic hit lying down.
“The increase in tariffs is likely to result in more policy easing from China, both monetary as well as fiscal,” they wrote.
Bank of America-Merrill Lynch analysts agree that an all-out tariff war with taxes on almost all trade between the US and China would likely result in a renewed Chinese property boom.
“What is unique in this scenario is that it would likely bring a general relaxation of property market controls such as purchase limits, price limits, sales limits, and mortgage limits, etc, with a very high level of autonomy granted to local governments to promote property development,” they wrote.
That may end up extending the boost Australia’s commodity producers have received from higher prices over recent months.
However, Citi warns that eventual moves towards property taxation may see speculators flee the Chinese property market, or it might collapse through sheer oversupply and indebtedness.
If and when this happens, the same forces driving demand for Australian commodities up will reverse.
“The property sector tends to affect a broad set of industrials and contributes to around one-third of China’s industrial output, directly and indirectly,” Citi’s economists cautioned.
“Meanwhile, the declining property price may trigger rising default risk on the housing debt, potentially threatening the financial stability as well.”
But can-kicking has become the speciality of global policy makers, and the road hasn’t run out yet.