China Property Slowdown Signals Danger for Economy
On the surface, China's property prices are still on the rise, with year-on-year home prices increasing 1.4 percent in December. But the pace of investment in the real estate sector, which contributes a huge chunk to China’s GDP, has been easing sending a signal that any slowdown in the sector could have broad repercussions for the economy.
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“Alongside the euro zone, real estate is clearly the largest downside risk facing China this year. If real estate investment was to slide - and it is - a slower growth rate would be unavoidable,” Alistair Thornton, Analyst at IHS Global Insight, told CNBC on Wednesday.
Real estate investment, which makes up 13 percent of the economy, grew 27.9 percent in 2011 from a year earlier, but analysts including Peter Churchouse, Chairman of Portwood Capital, a property investment firm based in Hong Kong, believe investment growth in the sector could more than halve to 10-12 percent this year. According to Churchouse that would lead to an overall growth of just 7 to 7.5 percent in 2012. That's the good scenario.
A more dangerous scenario, according to Patrick Chovanec, Associate Professor at Tsinghua University in Beijing, would be if real estate investment stayed flat. In other words, the country built the same number of houses and apartments as it did last year. By Chovanec's calculations, in such a scenario, China's GDP growth would fall to just 6.6 percent this year, potentially creating a severe "hard landing".
Chovanec also says official data on property prices don’t give the whole picture. Official statistics showed a 1.4 percent year-on-year increase in December, and just a 0.3 percent decline over the previous month. He says there's plenty of anecdotal evidence of developers trying to raise cash by cutting prices by over 30 percent and offering freebies such as BMWs.
"What happens in a bubble is that pricing becomes very opaque, volumes fall off before prices fall off," says Chovanec. "The actual transaction price is signed below the asking price, and the official reported transaction price may not represent the full value of the transaction."
A lot will depend on what the government does to ease the pain from a housing slowdown. Churchouse believes much of the investment in the real estate sector in 2012 will come from government plans to construct 7 million units of affordable housing. China could also ease credit conditions, though Tsinghua's Chovanec believes that will boost inflation, which at 4.1 percent is still above the government's 4 percent target for 2011.
The over-investment seen in the housing sector over the past few years could be a harbinger of a much broader problem - the over-investment in all fixed assets such as roads, bridges and factories. And it's here that Chovanec sees a bigger danger. "For the past three years, China's GDP has been driven by an investment boom, you've been pouring money into factories and adding capacity."
According to his calculations, fixed asset investments made up 5 percentage points of China's 9.2 percent GDP increase in 2011, while consumption made up 4.7 percentage points and net exports were minus 0.5 percentage points.
If fixed asset investment were to plateau in 2012, and all other things were to remain the same, he points out that GDP could drop to as low as 4.2 percent this year, a catastrophic level for China's millions of migrant workers.
Chovanec says that's not necessarily going to happen but it's only an illustration of how reliant the country has been on an investment boom. "It doesn't take that much to drain the pool when you're that reliant on fixed asset investments."
© 2012 CNBC.com
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