When you hear about the current economic crisis in China, you might wonder what this has to do with the UK. Unfortunately, the turmoil currently being experienced on the Chinese property market can have more impact on the British economy than you might think.
In China, real estate used to be a key driver of the economy, accounting for around 25% of the GDP. Analysts presumed the sector was too big to fail. However, the property market has declined by around 7% year on year and prices are down by 1.3%. Even China’s second largest property developer, Evergrande, is struggling.
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“Boom and bust” market
More real estate companies are being swallowed up by debt. Property developers are no longer building new homes and buyers are delaying entering the market. The whole system has run out of capital. Analysts have described it as a “boom and bust” situation.
A failure to regulate the market during the boom period has resulted in China having limited options now it’s going bust. This still begs the question why this impacts the UK. The answer lies in the number of Chinese investors in the British housing market.
Financially sound Chinese investors were always looking for investment opportunities in the British housing market. There were more opportunities for international investment in the post-Brexit UK property sector, as prices in general dipped.
In the second half of 2016, since the Brexit vote, the number of property inquiries from Chinese investors increased by a massive 40%, compared with previous years. This included both commercial and residential properties.
Prior to Brexit, although there was Chinese interest in UK properties, rising house prices and uncertainty surrounding the vote deterred potential buyers.
Post Brexit investment boom
After Britain voted to leave the EU, the pound was trading at a 30-year low against the yuan and dollar. This reignited the interest of Chinese bargain-hunters in the previously unaffordable UK property market.
During the past 12 months, 23% of house purchasers in London have been from the Asia-Pacific region. They have been one of the biggest groups of international buyers, largely due to the weakened pound against the Chinese yuan. Post Brexit, the price of property in Britain has become 10% cheaper when purchasing with the yuan.
Chinese investors look for an investment that brings a good ROI in years to come. The ROI on properties in London between 2010 and 2016 was between 15% and 20%.
While London contains more than half of the properties bought by Chinese investors, they have also bought up real estate in Northern cities such as Cheshire, Manchester and Nottingham. They have the ability to impact the UK housing market due to the increase in their investment in recent years.
Negative impact on UK
Market analysts say UK companies have already been negatively impacted. The 25% of GDP that the real estate sector contributed to China’s total income comprised not only construction, but also servicing, commodities, retailing and miscellaneous inputs. British companies in China are now feeling the knock-on effects of the market slump. Chinese developers who are experiencing financial difficulties are defaulting on payments to the British firms that have contracts with them.
Experts predict industry regulators, and the Chinese government will get the current crisis under control – if China’s property market failed, it would be disastrous for the economy. There are suggestions the government has instructed state-owned property developers and banks to come to an agreement by liaising with the Ministry of Housing and Urban-Rural Development.
Could Britain’s property market slump?
Economists are unable to predict whether the same fate could befall the UK property market. However, it has been suggested that by watching the events unfolding in China, Britain will be able to use this as an indicator of the future of the market and make decisions on the front foot.
Since chancellor Kwasi Kwarteng’s mini-budget in September announced tax cuts, including abolishing the 45p rate for the highest earners, it sent the economic market into freefall. Analysts voiced fears the UK property market could be about to crash as a result.
Homeowners and potential buyers were left worrying whether their mortgage deals would cost them hundreds of pounds more than they anticipated each month. Others started pulling out of the property market or preparing to downsize.
The Prime Minister and the chancellor announced a shock U-turn on 3rd October, reversing the unpopular plans to abolish the top tax rate, after caving in to pressure from ministers and financial institutions. However, Labour ministers say the reversal is “too late” and only time will tell whether the economy will start to recover.
Consumers find it harder to borrow money during an economic downturn, so whereas mortgage holders might consider taking out an additional loan to tide them over the tough times, the current lack of deals on the market may prove prohibitive.
People may look for alternative means of borrowing money, such as applying for a logbook loan secured on their vehicle, rather than applying to their bank, to help get through these challenging times.
Research has found 40% of people with a logbook loan are in full-time work, with the remainder not working, due to either being made redundant, or having other responsibilities, such as being a carer for a family member.
Those who aren’t in full-time employment traditionally find it more difficult to get mainstream credit at the best of times, so they become further marginalised as the economic climate worsens. For people in this demographic, a logbook loan can provide a lifeline in a financial emergency.
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