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Can Low Household Debt Contain Chinese Real Estate Prices?

While Chinese households continue to bear a comparatively modest share of national debt, their high savings levels continue to drive up prices in the residential real estate sector.

New research from Savills notes that China’s household debt ratio is far lower than other major economies, accounting for just 44% of GDP as compared to 80% in the USA, and a developed economy average of 74%.

China’s per capita debt burden currently stands at USD$20,000, as compared to $145,300 for the US and $134,000 in Japan, while the country also has a high savings rate at 36% of disposable income.

According to Savills while its debt levels are low, China’s high savings rate is playing a key role in rising home prices, with capital flowing directly into the housing market due to low returns on bank deposits and expectations of strong returns on real estate.

The research further notes that there is no necessary relationship between total debt levels and real estate bubbles or economic crises.

Looking at the case of Japan, its overall debt levels have been comparatively high since the start of the 1990’s, yet housing prices have remained tepid across the period.

In the US government debt has remained comparatively high as a share of GDP and continues to climb, yet the tightening of mortgage loans in the wake of Basel IV has curbed growth in household debt.

The Savills report further points out that in the US housing values remain under three times household debt levels, in China the housing market possesses assets that are eight times greater than total household debt to serve as collateral.

Gan Li (甘犁), an academic from Chengdu’s Southwestern University of Finance and Economics, said in a recent study that the problem for China is that real estate comprises an excessive share of household wealth.

According to his research real estate accounts for as much as 68% of Chinese household assets, while in Beijing and Shanghai this figures rises to as high as 85%.

 

 

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