Housing bubble?

For a long time, many economists have warned there is a big bubble in the Chinese property market and also explained the serious consequence when the bubble is burst. This week, Jianlin Wang, whose company is China's largest commercial property developer, also warned that the Chinese property market was the biggest bubble in history.

Such comments are not new at all, and as usual the market ignores the warnings and the sales in 52 cities in China experience a year-on-year increase in September despite the official data about the Chinese property market are not announced until early October. Moreover, there is a divergence in the property market between city tiers. The housing prices in first-tier and second-tier cities increase sharply while the housing prices in third-tier cities actually drops. However, the sales in first-tier cities fell 9% in September year-on-year. And the sales growth in second-tier cities maintained August's sales growth of 29%. The sales growth in third-tier cities recorded 31%, up from 23% in August. As the sales are measured in square meters, it does not precisely explain an accurate demand-supply relationship, but it could show some facts about the market. Such a decrease in housing sales in first-tier cities is possible to trigger a burst in the housing market bubble, but I don't think this will be the key trigger.

I think that the key trigger will happen in the banking sector. Some Chinese banks do not have strong financial positions and hold properties as part of their assets. In China, many people borrow mortgages from banks in order to buy their houses and flats. When these people have not finished paying back their mortgages, the banks are holding their properties. Once the property prices fall sharply, people may do what the Americans did in 2007 and 2008, then causing a collapse in the property market. However, there is another probability that if one bank has too many bad debts and a very high leverage ratio, it may sell the properties it holds and when the market realizes how many properties this bank holds, they may question if the banks hold most of the properties and if there is excess supply in cities, even the properties have been sold out quickly. This could drag down the property price sharply and cause a collapse of the property market.

I think the second state has a much higher probability as the prices in the Chinese property market is not very likely to fall spontaneously due to the Chinese culture, the fall of the prices has to have a trigger, and that trigger I think is from the banking sector.