China and Dubai: how property markets are different but troubled
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Events in Europe have focused attention on China, and foreign observers are worried that China's property market will correct sharply.
The property market is certainly a challenge, but comparisons with events in the rest of the world are misplaced. It is especially tempting to compare China's property market to that of Dubai. Some commentators have argued that, like Dubai, China is also building "castles in the sand," and when monetary policy is tightened, the "castles" will collapse as the "sand" disappears.
There is certainly reason to worry about the property market. And the State Council's property-related tightening measures, introduced in April, were welcome. Yet, there are important differences between China and Dubai that are often overlooked.
The first observation is population. Dubai's population is made up of mainly expatriates. Only 1.2 million of the UAE's 6 million population is made up of Dubai nationals. So when the credit crisis struck, a sizable number of expatriate workers left the country, leaving a large shortfall in demand. Indeed, Dubai's population is estimated to have fallen 8 percent since the crisis.
The reverse is true in China. The country not only has a large domestic population, but also rising urbanization rates imply a steady flow of villagers to cities, thus creating structural demand for housing. Indeed, rising urbanization rates are expected to be a major driver of GDP growth over the coming decade, a point often overlooked by foreign commentators.
The second observation is that leverage played a larger role in Dubai's property market than it has in China. Most apartments required only a minimal downpayment, while developers took payment on apartments for which construction had only just started.
This model worked so long as credit was freely available, but collapsed when credit tightened because of the financial crisis.
By contrast, China requires a far higher downpayment, while some households pay for their apartments entirely in cash. The recent tightening measures have further reduced the importance of leverage to the property market.
There are also far stricter restrictions on the ability of property developers to sell apartments before their construction has finished.
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