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Worries that the Chinese property boom could be about to go pop are mitigated by the fact the government there is placing what seem to be sensible limits on mortgages and investment
Chinese learn from Western mistakes
KEVIN PATERSON, SALES AND MARKETING DIRECTOR, ASSURANT INTERMEDIARY
China has been an attraction for investors looking for growth for almost a decade, with no sign of a slowdown. But could the bubble - especially in the property market, with many echoes of the UK in the years leading up to the present downturn - be about to burst?
In the past five years alone you would have trebled your investment if you had bought property in China so it’s no wonder that an increasing amount of foreign cash is pouring in. And the country hasn’t been slow to show off its new-found position in the world from the Beijing Olympics to the Shanghai Expo (pictured), not to mention the latest addition to the Formula 1 calendar - Prix.
While the stock market is still down on the highs of 2007 China has not been immune to the worldwide recession but it has fared better than most, with growth this year running at almost 12% annually.
But many experts now fear that China is sitting on a property bubble that could be about to burst.
The culture in China has been predominantly to invest in property instead of saving, with many would-be magnates buying multiple properties at a time, normally off-plan, with two or three mortgages.
It is estimated that the total area under construction in China is three times the size of Greater London and the fear is that there simply won’t be the demand to meet the speculative construction, even in a country with almost 1.5 billion people accounting for 20% of the world’s population.
There is one important caveat to add here, which is that the Chinese government has taken some steps to try and reduce the risk of a collapse in the property sector which is playing such a significant role in the country’s asset growth.
Mortgages on the first property are restricted to 70% LTV - on the second purchase this falls to 50%
The government has placed limits on mortgages by restricting lending on a borrower’s first property to a maximum of 70% LTV. On the second purchase this falls to 50% LTV. And the interest rate on these mortgages must be set at least 1.1% above the central bank base rate, currently running at around 6%. Should investors want to purchase a third property rates are significantly higher, with an outright ban on purchasing third properties in Beijing.
The Chinese government believes these measures will cool the market without damaging it in the short to medium term.
It all sounds eminently sensible and is an example of where a combination of state intervention and free markets can work together.
Perhaps it could even provide a valid alternative to the ’let the market decide’ mentality that has led to boom and bust cycles for us. It certainly seems that China is learning from mistakes of the past in the West.
Muddled verdict could be a clear benefit for the country
At the time of writing, the Conservative-Liberal Democrat coalition government has just been announced and we are yet to see the details.
As someone who has always been a staunch supporter of the Tories I was initially sceptical but am rapidly coming to the conclusion that this move is genius.
Unelected former Prime Minister Gordon Brown finally conceded and resigned, faced with nothing but a fractured party, having clung to power for almost three years like a desperate man to a lifeboat. The country sunk his lifeboat and made the decision for him - and not before time.
Of course, the problem was that although with 11 million votes the Tories were the most popular party, Labour still managed to get nine million despite the damage it has done to the country in its 13 years in power, while the Lib Dems managed a respectable seven million.
So the message from the electorate was clear - we don’t think any of you can be trusted. That’s why the Conservatives have formed a coalition with the Lib Dems to create a meaningful government.
I already considered Tory leader David Cameron to be strong but he has demonstrated great foresight in going further than many thought he would in forming a coalition government.
The benefit to the country is to bring the right closer to the centre, which is where most of the public want their politicians to be.
But how will this affect our industry and country?
Well, the Tory manifesto aim to lift the Inheritance Tax threshold to £1m has been scrapped and its pledge to move banking regulation to the Bank of England is also in doubt. The Lib Dem cornerstone of fairness is one that easily fits into the Tory ethos, while the increase in Stamp Duty mooted by the Lib Dems on properties over £1m has been kicked into the long grass.
And both parties agree on electoral reform, it’s just the format that needs to be agreed. Interestingly, they seem to agree on many policies, and it’s good that no party will have an outright majority like Labour did in 1997.
This should act as a sense check on big policy decisions rather than the nod-through approach of the Labour government.
So on balance, this a great outcome. We have a progressive young government with appropriate checks and balances, and a significant mandate to sort out the mess.
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Readers' comments (1)
Armand | 17 May 2010 3:42 pm
You're living in fantasy if you think CCPs measures are going to stop the bubble. They have been setting measures since January and it is one record rise after another. People get around the measures by divorcing, false loan applications, family members. Nothing can be done and with all this hot money flowing in it only fuels it beyond. The REAL demand in China is for AFFORDABLE homes, what is being built is not affordable but high end. The demand for this is not there. It will continue until the banks close and then the rich and middleclass will be wiped out.
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