A Chinese property crash could turn out to be the canary in the coal mine for property markets in the West

March 25, 2019

Forecasting Eye


Chinese property investment is hugely important internationally – one estimate even has the sector accounting for 4% of global GDP. Signs of distress emerging among developers in China may yet prove to be a precursor for property market trouble in the West. With the slowdown in growth already affecting other Asian economies the question is: how far could contagion spread? While the Chinese government are never shy of intervening in markets and may take the sting out of the latest price declines, should they fail the ripple effect could reach as far as London.


China’s rapid economic growth has been fuelled by urbanisation on an unprecedented scale and conditions have been ripe for Chinese property developers. Over the last decade Chinese households have relentlessly pursued the chance to own property, often funding speculative purchases of second and third homes. Developers, seeking to meet this demand have borrowed heavily to take advantage of soaring prices. Rumours abound of tax-shy businessmen and well-connected officials funding purchases with suitcases full of cash and topped up by further debt. Paradoxically, while a fifth of Chinese property stands empty [1], housing in major cities is unaffordable to ordinary households – the fundamentals of the property market make current price levels look untenable. 


More recently, anti-speculation measures have curbed the worst excesses of the last few years. Without double digit price growth to support their ambitious plans some developers are beginning to show signs of trouble. Last year, Evergrande, one of the largest developers in mainland China raised debt at double digit interest rates while slower sales have recently prompted them to slash prices across their portfolio. Their systematic cutting of prices has created anger among retail property investors who feel they have been mis-sold. Should the middle classes stop buying in fear for their savings, a downward price spiral could follow, as developers chase sales at cut prices to cover their debts.


In 2017, the University of York concluded that 13% of new build properties sold in London were bought from overseas. Three fifths of these purchasers were from just four countries: Hong Kong, Singapore, Malaysia and China. Others will have bought homes in the second hand market. If the York study’s findings were typical of the last five years and replicated across all transactions in London, up to 80,000 London properties could be owned by nervous Asian investors, many of whom may have debts to cover in their home markets. Faced with the choice of selling into a free-falling Chinese market or the relative stability of the UK, the London property is likely to be the first they sell. 


Following stamp duty changes, which had a chilling effect on the higher priced segment of the London property market, a second reduction in demand is on the horizon. Many well paid finance jobs already face relocation to continental Europe in reaction to Brexit fears, leaving landlords short of tenants.  An exodus of Asian investors would increase competition with other sellers in the capital, at a time when buyers are thin on the ground. The inevitable outcome of this is prices falling further. Here at Cebr we will be watching the Chinese property market with interest. If the recent price dip turns to collapse then London could well suffer from the contagion. 


[1] China Household Finance Survey


Contact: Alastair Neame- aneame@cebr.com

+44(0)20 7324 2878