The year has started with, if anything, an exaggerated version of what we saw in 2015. Financial markets are volatile and equity markets particularly so. America’s Federal Reserve put up interest rates late last year but the prospect of the Bank of England following suit – while still potentially on the cards this year – has receded by some months. The safe haven that is property seems destined to remain so for a while yet.
Perhaps, however, we should look in a little more depth at what lies behind the shaky start for financial markets in 2016. While a number of factors could be cited in what George Osborne chose to describe as a “dangerous cocktail” of risks facing the British economy, including Iran-Saudi Arabia tensions and the continued weakness of oil and commodity prices, the biggest global worry is China.
On one level, the Chinese story is a simple one. After more than three decades in which Chinese economic growth averaged an astounding 9.5% a year, the world’s second largest economy has slowed to between 6% and 7%. That, on the face of it, is neither surprising nor should it be particularly troubling. It was inevitable that, as China became bigger and more prosperous, and closed the gap in living standards with the West, growth would slow. For oil and commodity markets, of course, the effect of that slowdown has been disproportionate. In the period when China was both big and growing rapidly, it was easily the biggest driver of energy and commodity prices.
But there is another part of the story that is perhaps of greater relevance to Estates Gazette readers. In the period immediately after the global financial crisis, the Chinese authorities were not content merely to carry on growing in a troubled world. The measures they took to stimulate the economy, including a large fiscal boost and policies deliberately aimed at generating credit growth, worked. In 2010, China grew by more than 10%, only slowing below its long-run rate in 2012.
China’s successful growth stimulus had consequences, however. Most notably, it blew up not just a stock market bubble but also a series of property bubbles. House prices boomed in most Chinese cities in 2012 and 2013, fell back when the authorities reined back on some of their stimulus measures in 2014, and rose again last year. But China’s real estate boom was not confined to prices. In an echo of countries such as Spain and Ireland before the crisis, easy credit availability also resulted in a building boom. Despite the recent behaviour of prices, there is significant oversupply of property. There is also oversupply of commercial real estate, for similar reasons, most notably in China’s second-tier cities. Again, the combination of available credit and disappointing growth numbers has proved damaging. The talk of empty office blocks and warehouses is not just anecdote.
China will no doubt work its way through these property problems, though not without some difficulty, including for its banks. Financial markets will eventually get used to the idea of a slower-growth China. Oil prices will return to more normal levels, though will remain much lower than in the recent past.
There is, however, a wider lesson from China, and it has direct relevance here. The Chinese authorities are not the only ones which, in adopting unusual policies to get their economies through the crisis, succeeded in boosting property. Nearly seven years of near-zero interest rates, £375bn of quantitative easing and targeted housing measures have had their effect in Britain.
There are differences. The availability of property lending has been much more constrained and there has been no substantial increase in supply, particularly on the residential side. But China’s woes are a reminder of what happens when governments and central banks try to start the process of normalisation. In China, it meant deflating a bubble and then, when this went too far, reflating it again. In Britain, at some stage, the challenge of normalisation will also have to be faced. That will be when property here has a bumpy ride.
David Smith is the economics editor for the Sunday Times
