China's looming property bubble

Despite the efforts and claims by government, media and developers, property prices are in decline. Beijing is pressuring banks to meet new government requirements to cover loan/loss ratios, triggering a rush for additional funds from new offerings and bond issues. Banks face a growing NPL risk from lax credit control, questionable practices, concealed debt, and corrupt officials.

Speculators requiring high prices and quick turnover to cover their apartment investments face declining property values, falling demand and pressure from banks. Even a 10 per cent decline in property prices could raise defaults by 300 per cent triggering escalating default rates. A 30 per cent decline could raise defaults by 500 per cent.

Summary

1. The state of the market appears reliant on questionable information on actual sales, level of speculation, the real level of debt and actual level of vacant floor space.
2. The market is unbalanced, favouring the luxury sector while demand is in the mid and low income sectors.
3. Possible state involvement and related dubious practices question the basis for media claims of continuing rises in the property market.
4. Banks argue they face "minimal risk of losses from such deals" but reject the need of disclosure in their financial statements.
5. The property market is politically sensitive and all information can be classified under state secrets legislation.
6. State media reporting on the property market is controlled by the Central Propaganda Department and related Ministries.
7. The market comprises a market naiive generation with experience only in a rapidly growing economy, rising personal wealth, and confident of government support in time of crisis.
8. Because of scale and sheer numbers of small speculators, any hint of impending foreclosure would immediately hit cyberspace, creating havoc for banks, developers, local governments and the CCP.

The consequences of creating and trading in illusions are likely to surface later this year.