COMMENT: While I try to be respectful of all views of the property market, it’s sometimes hard not to make sport of the various prophets of doom who predict that the market is about to crash. Sure, it’s wise to be cautious and vigilant and keep an eye on the risks the market faces – but the crash predictions have been so spectacularly wrong over a period going back several decades that the various predictions of imminent doom have begun to sound like templates of themselves where the key claims of the predictions remain the same and only the dates and players change.
Of course, there’s a valid counter-argument that says that the relative stability of the market over several decades is the very reason that we should be even more vigilant least we become smug and miss the signals if, or when, a real threat ever does hit the housing market with devastating impact.
It’s with that caution in mind that I’ve been keeping an eye on the recent developments in China in relation to Evergrande, a Chinese Real Estate company which was founded in 1996 and which owns more than 1,300 projects in more than 280 Chinese cities.
If you watch property news, you’ll be aware of the growing concerns about the stability of Evergrande and, in particular, warnings that the company is about to default on debts worth over $NZ400 billion dollars. This is happening against a backdrop of wider concerns about the Chinese market in which there are fears that the Chinese property bubble is about to burst with an impact which could rock the world economy. Indeed, you may have seen a recent video, released by an Indian news agency, showing fifteen empty high-rise apartment buildings in Kunming City, in China, being demolished in a series of controlled collapses in an attempt to avoid over-supply, after sitting empty for eight years, since their completion.
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So alarming are the developing signs that some commentators have been describing events around Evergrande as China’s “Lehman moment”, a reference to the 2007 GFC. The US Secretary of State has warned that the downfall of Evergrande could affect “the entire world”. In an eerie portend of this, another Chinese property company, Fantasia, also missed a bond payment of $NZ291 million this month, triggering a default, albeit on much smaller sums than are at risk with Evergrande.
Ashley Church: "The New Zealand housing market certainly felt the impact of the GFC." Photo / Ted Baghurst
So should we be worried about these developments here in New Zealand?
Worried? Probably not. Cautious? Absolutely. Many of us can remember some of the early warning sign of the events leading up to the GFC, an event which was triggered by the collapse of the housing mortgage market in the US. Ironically, it’s that same crisis which should give us some comfort about what to expect if the developing situation in China were to unravel.
The New Zealand housing market certainly felt the impact of the GFC, but to a far lesser degree than was the case in many other counties. House prices here bottomed out in 2008, 8.6% below the previous market peak, then quickly recovered. But here’s where it gets really interesting. During the GFC itself – generally accepted as the 22 months between July 2007 and March 2009 – there were actually more sales than during the period following the GFC. In fact, 37,607 houses were sold in New Zealand over this time and, of these, just 3461 properties, or 7.21% of the total number sold, sold for a loss on what the same property would have been worth two years previously – with a median average loss, across these properties, of $24,000. And get this – 78% of properties sold over this time made a median profit of $52,000!
In other words, the GFC had very little effect on the housing market overall and things continued more or less as normal.
Of course, there are no guarantees that a Chinese market collapse – if it were to happen - would affect us in the same way. But then, this and the GFC are by no means the only global financial events of recent history. We’ve also had the 1987 Share market crash and the Asian Financial crisis in the late 90s, and none of these events dented the relentless march of the New Zealand property market over the past 40 years.
By all means keep an eye on the situation developing in China, but I wouldn’t be losing too much sleep over it.
- Ashley Church is a property commentator for OneRoof.co.nz. Email him at [email protected]
