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Old 19th July 2007, 05:15 AM
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Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

http://www.economist.com/finance/dis...ory_id=9440844

Home truths
Jul 5th 2007
From The Economist print edition


Talk of a housing bubble in China and other parts of East Asia is much exaggerated

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TEN years after the start of East Asia's financial crisis, some economists are fretting that the region is heading for another bust as abundant liquidity and low interest rates inflate bubbles in shares and housing. The bursting of property bubbles in 1997 played a big part in the region's economic and financial meltdown. Average house prices fell by 20-50% in real terms in most countries between 1997 and 2003. In Hong Kong, nominal prices slumped by as much as two-thirds.

China escaped relatively lightly in 1997-98. But today a collapse in house prices could have nasty consequences—more severe than a bursting of its stockmarket bubble. That is because 80% of China's urban households now own their home (in America, the national figure is 69%), compared with only around 10% owning shares. It is fortunate, therefore, that for all the talk about a housing bubble, by most measures it does not exist.

Average house prices have risen by 30% in China since 2002, less than the 46% jump in America. Admittedly, prices in Shanghai have almost doubled. At the peak of the boom in 2004, the prices of luxury apartments in Shanghai were rising at an annual rate of 50%, but the government has since successfully cooled the market with a capital-gains tax on homes resold within five years and an increase in minimum down payments. In a developed economy, double-digit annual price gains would indeed look bubbly, but not in an economy where nominal GDP is growing at a rate of 14%.

Across the globe, studies show that in the long term the main driver of house prices is income. The ratio of average house prices to average incomes is currently flashing red in America, Britain, Spain and quite a few other developed countries where it has soared to record highs—ie, above levels that preceded previous crashes.

In China, in contrast, average nationwide house prices have risen much more slowly than incomes. According to a report in the latest China Economic Quarterly, the ratio of house prices to disposable income has fallen by 25% since 1999. Even in Shanghai house prices have barely outrun incomes. A study by Bank Credit Analyst, a Canadian financial-research firm, concludes that, based on the long-run relationship between house prices and GDP per head, China is one of the most undervalued markets among those that it studied.

Another symptom of a bubble would be a big increase in mortgage borrowing. Heavy debts would also exacerbate the consequences of any fall in house prices. Mortgage debt has been rising rapidly in China, but from a low base. Before 1997 there were few mortgages, and even now they account for only 10% of GDP, compared with 70-80% in America and Britain. Over half of Chinese owners obtained their homes at well below market rates during the housing privatisation from the late 1990s onwards. Apartments were sold to tenants at rock-bottom prices and, because households had large savings, only half of all owners have a mortgage. Of those who bought with a loan in 2005, the average mortgage was only 63% of the home's value; in America 100% mortgages have been common.

Elsewhere in Asia property prices have also risen briskly during the past few years, but this follows sharp declines, so prices are still below previous peaks. After the property crash of the late 1990s, consumers were less keen to take on housing debt and banks were reluctant to lend. It has taken years for confidence to recover.

The hottest market this year is Singapore, where house prices jumped by 14% in the 12 months to March; luxury properties are up by 30-40%. However, over the past four years as a whole, Singapore has seen the smallest gain in the region (see left-hand chart below) and is still 25% below its 1996 high. Likewise, despite much concern about a 12% leap last year in average house prices in South Korea, they have risen by less than a quarter over the past four years. The market in Seoul is certainly fizzing, with prices up by 20% last year, prompting the government to raise interest rates and to introduce tax measures to cool things down. Hong Kong saw property prices jump by 40% during 2004 and 2005, but they have since been relatively flat. Some luxury developments have hit new highs this year, but average prices are still 45% below their peak. In Thailand, Taiwan and Malaysia, house prices fell in real terms over the past year.


A recent study by the IMF finds little evidence of housing bubbles in most Asian countries. Since 1999 house prices have risen more slowly than income in South Korea, Thailand and Hong Kong as well as China (see right-hand chart above).

In contrast, in America, house prices have risen three times as fast as real incomes. Standard Chartered, a bank, calculates that in relation to incomes, housing in South Korea, Taiwan, Hong Kong, Singapore and Thailand is now 37-58% more affordable than it was during the peaks of those markets in the 1990s.

Don't buy in Mumbai

The only Asian country where a bubble leaps out from these charts is India, where average prices have risen by 16% a year over the past four years, well ahead of average income. It is the only country where house prices have surged by more than in America. In Bangalore and Mumbai prices doubled during 2005 and 2006.

According to Global Property Guide, a research firm, equivalent apartments in South Mumbai now cost three times more than in Shanghai, and not much less than in Tokyo—even though Indian incomes are much lower. Looking ahead the question is no longer whether, but by how much, prices will fall. Property prices in Mumbai and Bangalore have already started to slip this year as mortgage rates have increased sharply.

Elsewhere in Asia, expect home prices to keep climbing. The rest of the world is experiencing its biggest housing bubble in history: never before have real house-prices risen so fast in so many countries. But Asia has yet to join the party.
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Old 19th July 2007, 05:21 AM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

So the only real bubbles relating to China are subcranial?
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Old 19th July 2007, 05:39 AM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Quote:
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So the only real bubbles relating to China are subcranial?

I think the real bubbies are related to organizations. Consumer lending isn't developed enough in China to amount to any significant risk. A bubble can't develop if people can't borrow money easily.

Even in Indonesia, when the Asian crisis hit, the ones most badly affected are the organizations. The people were affected when banks closed down and bank owners run away with their deposits.
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Old 19th July 2007, 05:52 AM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

It looks like our economists are starting to get their heads around things.

By the time China has been on top of the economic rankings for about five years, we should start to get a sensible picture of how the plot unfurled. Bit like one of those slow motion replays you get in Soccer.
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Old 19th July 2007, 05:57 AM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Quote:
Originally Posted by Rubber Duck
It looks like our economists are starting to get their heads around things.

By the time China has been on top of the economic rankings for about five years, we should start to get a sensible picture of how the plot unfurled. Bit like one of those slow motion replays you get in Soccer.

Baring temporary economic recessions, the long term prospects in China is very good, and as long as chinese consumers in cities drive the demand, Korea and Japan will be buffered by the financial crisis caused real estate bubble crash in the West.

The countries in the region can still sell among themselves as they are doing so now, and Africa supplies the resources. The West in the meantime will still be occupied with the middle east, fighting the invisible foes.

Last edited by touchring; 19th July 2007 at 06:08 AM..
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Old 19th July 2007, 09:54 AM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Quote:
Originally Posted by Rubber Duck
It looks like our economists are starting to get their heads around things.

By the time China has been on top of the economic rankings for about five years, we should start to get a sensible picture of how the plot unfurled. Bit like one of those slow motion replays you get in Soccer.
Did you really say "soccer"? Are you really from Yorkshire or California? :o
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Old 19th July 2007, 09:58 AM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Quote:
Originally Posted by domainguru
Did you really say "soccer"? Are you really from Yorkshire or California? :o
I just used the term for the benefit of our American friends. A lot of them seem confused enough already without getting into definitions of what the word football means!
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Old 19th July 2007, 10:19 AM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Quote:
Originally Posted by touchring
http://www.economist.com/finance/dis...ory_id=9440844 Of those who bought with a loan in 2005, the average mortgage was only 63% of the home's value; in America 100% mortgages have been common. .
Only a small percentage of loans are more than 90% in America. There are some 95% lloans from banks for people
with substantial assets and credit score, and some where the builder pays 5%, but basically they are adding the 5%
to the cost of the house over the long run. I don't even recall ever seeing any advertising for 100% loans from any
legitimate lender.
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Old 19th July 2007, 10:23 AM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Quote:
Originally Posted by bwhhisc
Only a small percentage of loans are more than 90% in America. There are some 95% lloans from banks for people
with substantial assets and credit score, and some where the builder pays 5%, but basically they are adding the 5%
to the cost of the house over the long run. I don't even recall ever seeing any advertising for 100% loans from any
legitimate lender.
It certainly has been possilbe in the UK, but it invariably comes at a price.
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Old 19th July 2007, 12:50 PM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Quote:
Originally Posted by bwhhisc
Only a small percentage of loans are more than 90% in America. There are some 95% lloans from banks for people
with substantial assets and credit score, and some where the builder pays 5%, but basically they are adding the 5%
to the cost of the house over the long run. I don't even recall ever seeing any advertising for 100% loans from any
legitimate lender.

In falling market, some might have hit 100% by now.

In Singapore, ever since the Asian financial crisis, when the banks say the loan shall not be more than 80% of the hoime value, they really mean it - at any point in time.

Since the only Americans that are familiar with a crashing home market are centarians , it will be better to do a little bit of study what happened in Thailand in 1998 and what happened in UK in the early 90s.

Last edited by touchring; 19th July 2007 at 01:29 PM..
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Old 19th July 2007, 02:29 PM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Those of us that remember the early 90s in the US are well aware of housing market downturns.

And don't believe everything you hear about a "crash". Speculators have stopped buying, inventories are up, prices are adjusting, but by no means crashing. The inventory will work itself out. Those that are highly in debt with riskier mortgages will encounter some problems. The rest will shrug this off.
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Old 19th July 2007, 02:36 PM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

Well that is not what it was like in the UK last time around. It was very deep and lasted years. It all depends on how deep a mess your esteemed leaders get you into. I would invest in a pair of chest waders and a drop snout filter if I were you. And bin those rediculous pink sunglasses.

Quote:
Originally Posted by thefabfive
Those of us that remember the early 90s in the US are well aware of housing market downturns.

And don't believe everything you hear about a "crash". Speculators have stopped buying, inventories are up, prices are adjusting, but by no means crashing. The inventory will work itself out. Those that are highly in debt with riskier mortgages will encounter some problems. The rest will shrug this off.
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Old 19th July 2007, 04:51 PM
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Re: Mortgages account for 10% of GDP in China, compared to 70%-80% in America/Britain

I think the US is still choosing the inflation path, trying to flood the market with as much money as possible by printing the free dollar when they should be raising interest rates to drain off the liquidity.

To kill the dollar just to avoid a few years of economic hardship is like cutting off the hand because it itches. Well, the itch stops, but you don't have your hand anymore.
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