We talk a lot about the housing bubbles in the US and Canada but sometimes forget to look outside North America. The post below outlines quite possibly the biggest housing bubble of them all and it’s in China. With all the worries around a housing bubble thanks to the subprime crisis investors and non-investors alike rightfully have their eyes out for signs of another crash. Have a read and let us know what you think the fallout would be from a Chinese housing bubble pop.

Click here to visit the original posting page over at ValueWalk.com.

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Property bubble? After three years of cooling, the Chinese property market is heating up once again, and the market’s recent action has attracted plenty of attention across Wall Street.

HSBC is the latest outfit to come out with a report on the sector, warning of the danger brewing under the surface. The bank’s analysts use China’s residential housing value-to-GDP ratio. In February 2010 this ratio surpassed the peak level in Hong Kong before the 1997 Asian financial crisis was also above the pre-subprime crisis peak in the US. HSBC estimated the total value of residential property was 3.27 times nominal GDP, higher than the 3.04 times recorded in Hong Kong in 1997. However, before the market got further out of control Chinese policymakers introduced property tightening measures, which worked extremely well. In addition to tightening measures the residential property value to GDP ratio benefited thanks to rapid nominal GDP growth of 18% year-on-year during the first quarter of 2010.

Chinese property bubble bigger than sub-prime

Policymakers have removed these property market tightening measures over the past two years. To counter the sharp fall in the stock market, a slowdown in economic growth and pressure on capital outflows China’s policymakers have allowed the property market to take off once again. New loans to property buyers have surged.

According to the People’s Bank of China, new loans amounted to RMB 11.7 trillion during 2015, surpassing the previous record set in 2009 when China was in the middle of releasing its RMB 4 trillion financial crisis rescue package. During the first half of 2016 alone new RMB loans reached a high of 7.5 trillion indicating that there is no sign of credit creation slowing any time soon. According to HSBC’s analysts who have studied the first half reports of 18 listed banks, new mortgage loans represented 46.6% of total RMB new loans during the first half. China Construction Bank was the biggest mortgage lender, with mortgages accounting for 62.7% of total loan growth in the first half. Initially, the government removed restrictions on the property market to try and clear the backlog of property inventory and ease concerns about the financial health of the sector. But now it would appear that the government has stoked another bubble.

Analysts at HSBC have been crunching the figures, and they believe that during the first eight months of 2016, property prices in urban areas rose by 18.13% year-on-year. Back at the end of February 2010, the national average price per square metre of property within China was RMB5,508 for urban areas and RMB473 for rural areas. Today these figures have risen to RMB9,570 for urban areas and RMB822 for rural areas. Property prices have spiked despite additional supply hitting the market. According to HSBC’s estimation, there will be 52,000,000,000 m² of floor space in the country’s property market by the end of 2016, 34% higher than in 2009.

Overall, combining both property price growth and higher GDP analysts at HSBC estimate that China’s residential housing value-to-GDP ratio is on track to hit 3.72 at the end of 2016. To put that figure into perspective at the height of the US sub-prime boom the country’s housing value-to-GDP ratio peaked at 1.75. Still, China’s property market looks relatively sane when compared to the peak of the Japanese residential property bubble in 1990 and Hong Kong’s current property market. During this period of Japan’s housing value-to-GDP ratio peaked at just under four and today Hong Kong’s ratio stands at around five.

Specifically the bank states:

Two charts that tell the story

The first chart was produced in The View in early 2010 when China’s total residential property value to nominal GDP ratio surpassed the level in Hong Kong in mid-1997, right before the Asian financial crisis.
The second chart shows that the market cooled between 2010 and 2014 after Beijing launched stringent tightening measures in early 2010. However, further easing in 2015 led to a fresh property boom. We estimate that the housing value to nominal GDP ratio is approaching the record level set by Japan in 1990. The ratio is even higher in Hong Kong – about 53% above its previous peak. Housing prices have been pushed up, mainly thanks to mainland liquidity, while growth has been stagnating.

Have low rates and QE structurally changed the housing value to GDP norm to allow a much higher housing value to nominal GDP ratio? We don’t think so. The bottom chart also shows that more than two decades of low rates in Japan have led to a decline in the ratio, and seven years of low rates and QE in the US have only resulted in a very moderate rise in housing value to GDP.

Finally, HSBC opines:

Worrying signs

It can take a long time for a country’s property market to recover once a bubble bursts. The US experienced a slow but steady post-subprime crisis recovery in the property relative to the economy. The scale of its property boom was relatively small compared to what’s happening in China and Hong Kong. In the case of Japan, after the burst of the housing bubble, the housing value relative to GDP ratio kept declining and stabilised at around 2.0x after the year 2000. It is worth noting that when Japan’s housing value to GDP ratio reached a record high in the early 1990s, the nation led the world in per capita GDP, surpassing USD30,000 in 1992. To put this into perspective, US GDP per capita in 1992 was only USD25,000. Meanwhile, the IMF has forecast that China’s nominal GDP per capita as of end-2016 would be USD8,240, less than one third of the level in pre-bubble Japan. This implies that China’s economy would have a much lower tolerance to any bursting of the property bubble. We believe new property tightening is inevitable, given that China’s housing value to GDP ratio is now approaching Japan’s record high when per capita GDP is still below USD10,000.