By TOM ORLIK
China's property sector is a larger but less worrisome animal than its U.S. cousin.
In 2010, investment in residential real estate accounted directly for 12% of China's gross domestic product, up from 10% in 2009 and a record. Throw in demand for construction material, and real estate's contribution is even larger. By contrast, the peak of spending on U.S. residential investment in 2005 was equal to just 6% of GDP.
Bloomberg News
A larger role for real estate in the Chinese economy means the consequences of a bust should be more serious than in the U.S. And recent years offer a worrying precedent. A crackdown on speculation saw growth in real-estate investment fall from 31% a year at the end of 2007 to 3% at the beginning of 2009. The hit to construction spending, as much as the fall in exports, crunched China's GDP growth to a decade low of 6.5%.
At first sight, history appears ready to repeat itself as prices run up sharply. The official house-price data tend to underestimate changes. But data from Soufun Holdings, which runs China's leading property website, show average prices in first-tier cities like Beijing and Shanghai rising considerably faster than disposable incomes.
Meanwhile, breakneck construction in 2009 and 2010 has created an overhang of supply—including the ghost blocks of high-end residential apartments bought for speculative purposes that loom large in the bears' arguments. The government continues to clamp down on speculators. That double whammy will at some point bring the price surge to an end and take the wind out of real-estate developers' sails.
But when private investment fell away in 2008, there was nothing to take its place. This time round, the government plans a huge investment in affordable housing. The thin margins available in affordable construction are cold comfort for listed developers, but plans to build 10 million new budget residences in 2011 should to an extent cushion China's economy from a sharp slowdown in private-sector construction.
In the U.S., post-crash housing is still weighed down by overbuilding in certain hot spots. In China, urbanization and rising wages mean most construction is better underpinned by demand. And houses are generally paid for with cash, not credit. In the U.S., mortgage debt reached 103% of GDP in 2007. In China, long-term loans to households, a proxy for mortgage borrowing, is 16% of GDP. Even throwing in loans to real-estate developers and a share of loans to local government investment vehicles—some of which are invested in property—takes the total only to 50%.
A slowdown in prices, if not an outright decline in some cities, is a distinct possibility. That will hurt private developers. A sharp enough correction will cause the banks pain and hit consumer confidence and spending. But it shouldn't signal economic disaster as it did in the U.S.
Write to Tom Orlik at tom.orlik@dowjones.com
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