China’s real estate market is not in a bubble, according to Morgan Stanley. The country’s property sector lacks the defining characteristics of a bubble: valuations, a sharp and steady increase in prices and excessive financial leverage.
Going by all three factors, China is “just not at that stage”, said Jerry Lou, Managing Director and China Strategist at Morgan Stanley.
The first characteristic of a bubble is that valuations needed to be “really expensive relative to GDP (gross domestic product)”.
“We have an income problem but we don’t have a property value to GDP problem,” said Mr. Lou.
China’s real estate values relative to GDP was currently at 150 percent, compared to 200 percent in the US following the housing crisis. This is the reason why China’s real estate market is not yet in a bubble, he said.
“The second point which is even more important, to call any property market a bubble, you need very, very excessive financial leverage,” he said.
Down payments have to be very low, close to zero percent, for it to be deemed a bubble, he added. “You don’t have that stuff in China ever, you never had that stuff. Even as of today, it’s 30 percent downpayment.”
The average equity held by homeowners in their properties is fairly high — “more than forty percent, if not fifty”, he said.
Lastly, there has to be a “deep, very vertical rally of the price” for the real estate market to be considered a bubble, said Mr. Lou.
“Chinese property prices haven’t really moved in the past 12 months. So maybe we had a bubble 12 months ago but as of today, it’s no longer a bubble,” he said.
Morgan Stanley still favours China’s real estate sector, with Mr. Lou encouraging investors to focus on bigger companies in the sector with healthy balance sheets.