The possibility of a collapse in China’s bubbly housing market has long been a threat hanging over the nation’s markets and economy. But exactly what would happen if the bubble bursts in a messy way?
Barclays sent a note out Friday looking at a trio of scenarios: a base case in which housing prices continue their slow-but-steady path lower, a “downside risk†case in which prices drop by 10% or so, and a “hard landing†situation in which a housing crash tanks the economy.
“Is China’s property bubble at the bursting point? Our answer is not yet. Our base case remains for a gradual deflating of the bubble over 2014-15,†writes Barclays economist Jian Chang.
“But self-fulfilling expectations of falling house prices, financial difficulties among developers on the back of a highly leveraged economy with huge local-government debt, and a fragile financial system with a large shadow-banking sector, suggest the risks of a disorderly adjustment are real and rising,†she writes.
In the base case, a gradual drop in prices and slower property sales would “weigh on overall investment and limit 2014 GDP growth to around 7.2%,†which is also the bank’s current forecast for China’s GDP expansion.
In the “downside risk†scenario, which Jian Chang assigns a 25% probability, “consumption growth would slow by more than in our baseline scenario but remain resilient, given the mild price correction,†while GDP growth would slow to between 6% and 6.5% this year and next.
As for the worst case, housing prices would tumble by more 30% nationwide, leading to “widespread defaults, insolvencies and bankruptcies,†as well as a liquidity crisis and GDP growth falling below 5% “for a couple of quarters.â€
While Barclays doesn’t assign a numerical probability for this last scenario, it offers some “factors†to watch out for. Possible precursors for such a collapse include “a sharp shift in financial-market risk attitude,†“failure of a major developer or a sizable financial institution,†and “policy mistakes as the government pushes reforms.â€
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