beyondbrics

It takes a bold forecaster to claim that China’s property sector is beginning to resemble that of Japan’s in the late 1980s and an even braver one to predict that this may be a good thing.

But that is exactly the thesis of Spencer Leung, an analyst with UBS in Hong Kong. He argues that as escalating price-to-income ratios for housing put it out of the reach of the middle classes – and in Beijing the ratio has already reached a stratospheric 27:1 - they will stop saving to buy homes and splash out on big-ticket consumer goods like cars and suits instead.

In Japan, the number of people in rented property who said they were saving to buy dropped from 33 per cent in 1977 to 15 per cent in 1986 as property became more unaffordable.

The same trend is playing out more rapidly in China. According to a People’s Bank of China survey, the number of people who said they planned to buy a home after a year declined from 33.3 per cent in the third quarter of 2010 to 27 per cent in the fourth quarter. Leung cites a study done in Japan that showed that in 1988, some 70 per cent of renters had given up the idea of buying a home, many opting to spend on improving their lifestyles instead

So far, so original. Leung spoke with a 27 year old white collar worker who had bought a car for 26 times his monthly salary. The man pays rent of Rmb1,200 a month in Beijing and says he cannot afford to buy a home even in his native Dalian in northern China.

But the anecdotal evidence that China’s twenty-somethings are prepared to spend multiples of their salary on luxury goods – in January, a McKinsey study on luxury shoppers in China also found many examples of this – does not mean they will do so for the next decade and a half, as Leung suggests, because they have given up the dream of owning their own home.

Indeed, it is hard to see how this 85 per cent of the population who cannot afford a home would be immune to the collateral damage from a general slowdown in property – or, worse still, a long decline in prices. This would bring about the negative wealth effect that China’s richer cities, such as Hong Kong, saw after property prices plunged in the late nineties.

Bloomberg reported today that Beijing had raised capital adequacy ratios for its big banks last month, another sign of its concern over China’s huge credit boom over the past two years. Given the price-to-income ratio of 27:1 for homes in Beijing, the country’s central bankers probably have reason to be worried. But seeing a prospective retail boom in those numbers is a silver-lining-in-the-clouds approach that a central banker cannot afford.

Related reading:
Guest post: China’s food for thought, beyondbrics
Chinese cars: chauffeurs are so 2009, beyondbrics
China: booming with a frown, beyondbrics
Poland: luxury’s next promised land, Material World
China’s shoppers: going strong, beyondbrics