Deutsche Bank: China’s Property Bubble Has Been Popped

China’s Property Bubble may have fizzled for good for the time being if data from Tier-3 cities confirms that the tightening measures introduced to cool the market in Tier-1and Tier-2 cities spark a countrywide property market slowdown, that’s according to Deutsche Bank’s latest special report in the China Property Bubble Series.

• China Property Buyers Are Loading Up On Easy Credit In Order Not “To Miss Out”
• Deutsche Bank: China property certainly in a bubble
•  The Big Short 2: Hedge Funds Bet Billions On China’s Fall

China’s Property Bubble Has Been Popped

Last year property price growth hit a high of 25% year-on-year in Tier 2 and Tier 1 cities across China during the third quarter. Land prices reported even more explosive growth. The land auction premium in Tier-1and Tier-2 cities hit nearly 60% year-on-year in the third quarter. Since spiking in Q3, the Chinese authorities have introduced measures to cool the property market but the majority of these measures were only introduced by local governments in Tier-1 and Tier-2 cities, Tier-3 cities remain unaffected. According to Deutsche’s chief economist Zhiwei Zhang, Ph.D. and Li Zeng, Ph.D., who authored the China property special report, trying to establish whether or not China’s property bubble will now spill over into Tier-3 cities is critical from a macro perspective. Tier-3 cities accounted for 70% of land sales (in volume terms) and 46% of property investment in 2016. It is, therefore, sensible to wonder whether tier-3 cities will be affected by those tightening measures as well.

There have been no specific tightening measures in many Tier-3 cities, and the land auction premium in the cities has on average not started to come down yet. The land auction premium in Tier-1and Tier-2 cities has already started to contract as measures introduced to cool the market start to have an effect.

Zhang and Zeng believe that ultimately the slowdown that started in Tier-1and Tier-2 cities will spread to Tier-3 cities. The land market will lead declines. As the land auction premium turns down, the “land-leads-property” mechanism will kick in and property price appreciation will gradually lose steam.

“There are two reasons for this call. First, the weak price appreciation thus far suggests that properties in these cities are not very attractive to “speculative” fund. Second, these cities are not “good substitutes” for tier-1 and top tier-2 cities. As a result, tightening measures in tier-1 and top tier-2 cities will not necessarily drive investment fund to these cities.

…

As a summary, we believe property price in most cities will soon start, or has already started, to lose momentum, including tier-1, top and bottom tier-2 and non-satellite tier-3 cities. The city group with most uncertain outlook is tier-3 cities that are satellites to tier-1 or top tier-2 cities. Such uncertainty arises from their (imperfect) substitutability with tier-1 and top tier-2 cities, which will likely be strengthened by current tightening measures adopted in tier-1 and top tier-2 cities. “

Looking for good small-cap stock ideas?

We asked ValueWalk’s most loyal readers what their #1 goal is.

Answer – small-cap investment ideas that are vetted and have liquidity, but not well covered.

Presenting ValueWalk’s exclusive quarterly magazine.

Across 25+ pages we detail actionable value investment ideas from qualified investors, with deep dives on at least four under the radar small-caps.

Take a look at and download this no obligation teaser. And if you want to buy the last issue, sign up for a whole year, or just find out more about what’s on offer, click here. One fund manager in the previous issue produced a return of 85% for his investors last year.

The post Deutsche Bank: China’s Property Bubble Has Been Popped appeared first on ValueWalk.

Source: valuewalk