The Chinese property boom is likely to cause a global property meltdown, says Ross Clark
EVERY NOVEMBER THE bigger estate-agent chains like to produce their forecast for the housing market for the coming year.
Usually it is a case of wishful thinking dressed up with graphs and tables: prices are always about to ‘settle down into a sustainable rate of increase’ (if the market is already booming) or they are about to ‘recover to a sustainable rate of increase’ (if the market has recently slumped).
The forecasts are therefore almost bound to be wrong. The one thing that the housing market never does is purr along at a sustainable rate of anything. It booms and it busts — however much anyone convinces themselves that things will be different this time.
This year, however, the estate agents’ forecasts have remained surprisingly subdued. In spite of having enjoyed a better time of it in 2009 than anyone predicted they would, most seem to be agreed that property prices will slump again next year, as more people put their homes on the market and reverse the shortage of supply over demand. Savills, for example, has predicted a ‘brief period of headline-grabbing price falls (-6.6 per cent) around the mid-year point’ — nothing if not precise.
Maybe it is all just a big bluff. Perhaps the agents are worried that if they talk up the market the Bank of England will say: okay, there’s no longer any need for quantitative easing – and we can stuff up interest rates, too. Or maybe they just haven’t noticed the giant panda in the room. If I were an estate agent — at least if I were selling posh flats in London — I would be packing some brochures in a suitcase and taking the next plane to Beijing.
If you think the credit crunch has ushered in a new era of financial responsibility you haven’t been to China in recent months. The excesses of the British property market in the decade 1997 to 2007 are nothing on what is happening there. China is the nation which had a huge monetary stimulus package — without ever having much of a slump in the first place. The result is massive inflation in the property market, with investors camping out for the launch of new apartment developments.
THE 2008 PROPERTY slump in China was a very brief and shallow affair. In the last six months of 2008 property prices stagnated in Shanghai and slipped two per cent in Beijing. Yet interest rates were slashed and banks leaned upon to increase their lending, just as in Europe and the US. The result was instant.
In the first six months of 2009, prices in Shanghai shot up 19 per cent and those in Beijing 27 per cent. As in Britain at the peak of the boom years, the price surge is unrelated to the demand for somewhere to live — huge numbers of apartments lie empty because their absent owners are only interested in capital growth, not shrinking rental income. It is pure speculation fuelled by cheap money.
The question is how much of this money will spill out westwards to property markets such as that in London, before the boom in China goes pop? There is a parallel between now and 1995-97 when the British property market was in the doldrums but money from Hong Kong started to inflate prices of London apartments. At one point every other riverside apartment in London was being sold to a Far Eastern buyer.
There is some doubt over how much Britain — or more especially our property market — means to the Chinese. Posh estate agents in London have for years been predicting the arrival of wealthy Chinese buyers. Trevor Abrahamson, who runs his own outfit in Hampstead, says he has seen waves of the world’s wealthy in the 30 years he has been in business.
First it was Arabs, enriched by surging oil prices in the 1970s. More recently it has been Russians. Yet he is still waiting for a Chinese buyer to come and take a big Hampstead house off his hands. It is a similar tale wherever you ask: we know the Chinese have got the money at the moment, so why aren’t they coming and buying a second or third home in London?
Speculation, though, is a different matter from actually coming here to live. There are some reports of Chinese investors active in Docklands, tempted by prices which crashed last year. But in 1997, developers didn’t wait for Hong Kong investors to come to London — they took their developments on roadshows to Hong Kong. It might become a fruitful activity again next year.
Hong Kong money dried up abruptly in 1997, when speculative markets in the Far East collapsed. It isn’t a question of if the same happens to the current Chinese property boom but when. Once that happens it is a fair bet that the slump we have seen so far in the global property market turns out to be just a rehearsal for the real crash. But in the meantime I wouldn’t be surprised if next year turns out to be quite a perky one for the London property market – however reserved the estate agents are now.