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China and Dubai: how property markets are different but troubled
By Ben Simpfendorfer |
May 27, 2010, Thursday
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Print Edition
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EVENTS in Europe have focused attention on China, and foreign observers are worried that China's property market will correct sharply.
The property market is certainly a challenge, but comparisons with events in the rest of the world are misplaced. It is especially tempting to compare China's property market to that of Dubai. Some commentators have argued that, like Dubai, China is also building "castles in the sand," and when monetary policy is tightened, the "castles" will collapse as the "sand" disappears.
There is certainly reason to worry about the property market. And the State Council's property-related tightening measures, introduced in April, were welcome. Yet, there are important differences between China and Dubai that are often overlooked.
The first observation is population. Dubai's population is made up of mainly expatriates. Only 1.2 million of the UAE's 6 million population is made up of Dubai nationals. So when the credit crisis struck, a sizable number of expatriate workers left the country, leaving a large shortfall in demand. Indeed, Dubai's population is estimated to have fallen 8 percent since the crisis.
The reverse is true in China. The country not only has a large domestic population, but also rising urbanization rates imply a steady flow of villagers to cities, thus creating structural demand for housing. Indeed, rising urbanization rates are expected to be a major driver of GDP growth over the coming decade, a point often overlooked by foreign commentators.
The second observation is that leverage played a larger role in Dubai's property market than it has in China. Most apartments required only a minimal downpayment, while developers took payment on apartments for which construction had only just started.
This model worked so long as credit was freely available, but collapsed when credit tightened because of the financial crisis.
By contrast, China requires a far higher downpayment, while some households pay for their apartments entirely in cash. The recent tightening measures have further reduced the importance of leverage to the property market.
There are also far stricter restrictions on the ability of property developers to sell apartments before their construction has finished.
So, everything is fine in China? Not quite. Dubai's problems also offer two important warnings.
The first warning is that foreign speculators were important to Dubai's property market. The city is a popular target for investors, whether from Iran, Russia, or the United Kingdom. But these investors left when their economies were hit by the economic crisis. The result was a further decline in demand that Dubai nationals were unable to fill.
Foreign speculators certainly play a smaller role in China's property market. Yet, local speculators invest in neighboring cities, and can leave easily, much like expatriates left Dubai. Curbing this type of investment is crucial, otherwise demand for residential apartments will grow faster than local economic conditions justify.
The second warning is that Dubai is a small economy surrounded by larger neighbors. A small increase in regional demand can have a large impact on Dubai's economy.
By contrast, China must rely increasingly on its own domestic demand to drive growth, so the importance of preventing a property bubble is far greater. If the property sector and construction activity were to correct sharply, regional demand could not provide the same support for China, as it has for Dubai.
More than ever, China must rely on its domestic demand if it hopes to escape the global economic crisis. This only emphasizes the importance of economic reform. The government's recent tightening measures were thus welcome. The local residency requirements imposed by some cities, was especially welcome.
(The author is chief China economist at the Royal Bank of Scotland. The views expressed are his own.)
The property market is certainly a challenge, but comparisons with events in the rest of the world are misplaced. It is especially tempting to compare China's property market to that of Dubai. Some commentators have argued that, like Dubai, China is also building "castles in the sand," and when monetary policy is tightened, the "castles" will collapse as the "sand" disappears.
There is certainly reason to worry about the property market. And the State Council's property-related tightening measures, introduced in April, were welcome. Yet, there are important differences between China and Dubai that are often overlooked.
The first observation is population. Dubai's population is made up of mainly expatriates. Only 1.2 million of the UAE's 6 million population is made up of Dubai nationals. So when the credit crisis struck, a sizable number of expatriate workers left the country, leaving a large shortfall in demand. Indeed, Dubai's population is estimated to have fallen 8 percent since the crisis.
The reverse is true in China. The country not only has a large domestic population, but also rising urbanization rates imply a steady flow of villagers to cities, thus creating structural demand for housing. Indeed, rising urbanization rates are expected to be a major driver of GDP growth over the coming decade, a point often overlooked by foreign commentators.
The second observation is that leverage played a larger role in Dubai's property market than it has in China. Most apartments required only a minimal downpayment, while developers took payment on apartments for which construction had only just started.
This model worked so long as credit was freely available, but collapsed when credit tightened because of the financial crisis.
By contrast, China requires a far higher downpayment, while some households pay for their apartments entirely in cash. The recent tightening measures have further reduced the importance of leverage to the property market.
There are also far stricter restrictions on the ability of property developers to sell apartments before their construction has finished.
So, everything is fine in China? Not quite. Dubai's problems also offer two important warnings.
The first warning is that foreign speculators were important to Dubai's property market. The city is a popular target for investors, whether from Iran, Russia, or the United Kingdom. But these investors left when their economies were hit by the economic crisis. The result was a further decline in demand that Dubai nationals were unable to fill.
Foreign speculators certainly play a smaller role in China's property market. Yet, local speculators invest in neighboring cities, and can leave easily, much like expatriates left Dubai. Curbing this type of investment is crucial, otherwise demand for residential apartments will grow faster than local economic conditions justify.
The second warning is that Dubai is a small economy surrounded by larger neighbors. A small increase in regional demand can have a large impact on Dubai's economy.
By contrast, China must rely increasingly on its own domestic demand to drive growth, so the importance of preventing a property bubble is far greater. If the property sector and construction activity were to correct sharply, regional demand could not provide the same support for China, as it has for Dubai.
More than ever, China must rely on its domestic demand if it hopes to escape the global economic crisis. This only emphasizes the importance of economic reform. The government's recent tightening measures were thus welcome. The local residency requirements imposed by some cities, was especially welcome.
(The author is chief China economist at the Royal Bank of Scotland. The views expressed are his own.)
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