Ominous signs of collapse in Chinese property market
What is the difference between a bubble and a correction? In the context of the global property market, the distinction could make all the difference between a full-blown economic slump and a gentle finessing of the world economy to ensure sustainable growth over the next stage of the cycle.
The bears are certainly out in force in China. For a long time, economists and global investors have warned of the dangers of a collapse in Chinese property, and all that entails for world economic well-being.
Now it seems to be reaching a critical stage in the world’s second largest economy, with all the key indicators looking ominously negative. But it seems that the UAE’s experience over the past few years has some lessons for Chinese leaders as they grapple with the problem.
The boom-bubble-bust cycle is a familiar one in the Emirates. You would hope the harsh lessons have been learnt from past failures, and that UAE policymakers and property executives have a few tips they could pass on to their counterparts in Beijing.
This is not to attempt to draw too close an analogy. In terms of sheer size, Chinese property dwarfs anything that has happened here, or is ever likely to. Recently the Financial Times calculated that in just two years, 2011 and 2012, the Chinese construction industry produced (and presumably consumed) more cement than the US did in the whole of the 20th century.
That is mind-boggling, if accurate, and a vivid indicator of just how rapid has been China’s growth as a modern economy with all the essential infrastructure involved.
Key to this was the aim of providing Chinese consumers with their own home. Starved of property ownership in the past because of communist orthodoxy, Chinese families were keen to become property owners, and official policy backed their ambitions by pumping up the construction industry to enormous heights.
The crash that affected the rest of the world (including the UAE) after 2009 was barely felt in China because the government kept churning out the credit to keep the construction boom in existence.
The results of that construction spree – backed by the failure to develop a financial market for property ownership – are today leaving China on the brink of a collapse that could have severe knock-on effects around the world.
Quite simply, there is now too much property on the market in China.
The UAE was in this position in 2010. An eight-year splurge in residential and commercial construction left the market very exposed when the financial crisis hit, putting speculative investment to an end, but also curtailing any genuine end-user business.
The UAE’s rapid recovery from economic downturn and an influx of wealthy investors, many from other trouble-torn parts of the Middle East, seemed to correct that unhealthy situation of over-supply pretty rapidly, even turning it into another boom for a while.
UAE policymakers seem to have foreseen the danger, however, and put in place measures – such as the doubling of property transaction charges, and much stricter mortgage rules – that now appear to have taken the sting out of the property threat.
The experts are now evenly balanced over UAE property. Some believe the pick-up in construction and completions over the past 18 months threatens another era of oversupply (though on nowhere near the Chinese scale) and consequently falling prices.
Others think that the UAE’s forecast growth rates – and population increases – will fuel the continued expansion of the property market, especially in the middle “affordable” sector. Some developers have identified this area as the key one for future growth, rather than the top-level luxury market which has traditionally been the focus, especially in Dubai.
Whichever turns out to be exactly right, there is actually little between them. The broad prospect is for a period of manageable, sustainable growth in UAE property over the next few years, with corrections, perhaps, but bubbles, probably not.
This, however, does not take into account the potential for some kind of external shock in the increasingly volatile region, from which the UAE has been largely immune, or indeed actually benefited.
Nor, of course, does it factor in the macroeconomic threat to the world economy of a property collapse in China.
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Published: August 26, 2014 04:00 AM