China Developing Its Own Real Estate Bubble

It’s nice to know that Americans aren’t the only people in the world that believe real estate prices can never stop going up. Apparently the Chinese share our affinity for bubbles.

From MarketWatch, real estate prices in China are going through the roof:

Beijing’s property prices are climbing at an unsustainable rate, with residential property in the city center leaping 6.5% in the past week alone, according to a report Friday in the state-run China Daily newspaper.

The report, which cited data from property broker Homelink, said some neighborhoods have seen demand for apartments at four times the number of units available.

“We used to talk about monthly price growth, but recently, it’s more about daily change,” the report quoted a Homelink broker as saying.

Developers such as Hong Kong-listed Soho China Ltd. are also worried about the run-up in prices.

“The bidders have gone irrational. A bubble in Beijing’s property market is definitely there,” the report quoted Soho founder and Chief Executive Pan Shiyi as saying.

The report said other large cities across China were seeing a similar phenomenon, with industry leaders now worried that the market is priming for a big drop at some point in the future.

“One thing we are concerned about is whether there is a new bubble being shaped. While people have a strong perception of excessive liquidity and further price growth, the possibility of a bubble is pretty big,” it quoted Gu Yunchang, secretary-general of the China Real Estate Association, as saying.

Recall, if you will, that the government has been pouring money into the economy in order to ward off the effects of the global recession. Ostensibly intended for infrastructure, there continue to be reports that the banks are essentially financing stock, commodity and real estate speculation. Looks like those reports might have some substance.

There may be an opportunity here to close the deficit with China. We have a huge head start in doing short sales, foreclosures and loan modifications. Somebody get to work figuring out how to cash in on this expertise!

Comments

[Graham and ...:]

China on the same, sorry path as ours, maybe two years behind.

Jul 03 10:53 AM

[Fred W:]

China already had a real estate bubble...if you were in Shanghai or even Hong Kong during 2004-5 you saw the running prices--"free" loans and western speculators were the main source of the run--not employment. You are merely seeing a slight re-inflation of same bubble...we are doing the same thing in the U.S. now.
We are not in a zero sum game--there must be "losers" if there are to be "winners"...WE have now chosen our children and their children to be the "losers".
This is not too difficult for leaders in DC to understand--they simply chose to ignore it in order to maintain power/get reelected. (the U.S. and China have painted themselves into the same corner)
It will get very ugly once the REAL problem loans face rate resets, we are not even 1/3 through this debacle.

Jul 03 11:11 AM

[Adam855:]

Definitely sounds bubbly, but I'd like to see affordability measures prior to concluding anything. Does anyone have data that could help with this?

Jul 03 11:14 AM

[Loan Survivor:]

What about all the Chinese money being invested in distressed US real estate? Propping up our markets a bit?

Jul 03 03:05 PM

[LilBob:]

The problem I see with China is that it's growing too fast. One of the side effects of Globalization is that the real income of the majority of the population gets averaged out across labor markets. The average Chinese will eventually match the standard of living of the average American, but that match will occur at a point when the average American has become far poorer than he is today. As labor costs rise and taxes and regulation increase in China multinational interests will rotate out of that country to other countries that are able to provide cheaper labor. Infrastructure development technologies and practices developed by Allied forces in the Pacific during WWII ensure that outcome.

Jul 03 03:22 PM

[Dave Wrixon:]

It might seem like a bubble to Americans, but there is one massive difference. There is huge gap between supply and potential demand. If the Chinese lend to their own people and they decide to invest in homes which is perfectly rational then prices will rise, but then this will in turn fuel demand which will result in more construction acting as a stimulus to the rest of the economy. Whilst the money is being spent investing to satisfy the needs of a rapidly expanding middle class, I cannot see how this is as dangerous a the US building so many homes that people would have to shuffle around like musical chair to provide an semblance of full occupancy. The really big problem here is that if China is lending internally rather than externally, then there is going to be little left over to finance the US Stimulus or lend to the US consumer. Not only that Oil will start to get expensive making a difficult US economy much worse.

Jul 03 03:27 PM

[LilBob:]

"...Whilst the money is being spent investing to satisfy the needs of a rapidly expanding middle..."

We ascribe to different notions regarding the outcome of globalization Dave. You're apparently on-board with those who think there will be benefits that raise all ships, while I'm on the side that believes that globalization will result in working people all over the world ending up in the same boat as John Steinbeck's "Okies," from the Grapes of Wrath. China will never have a burgeoning middle class, because financial capital will abandon the Chinese as soon as costs in that country rise beyond a certain thresh-hold.

Jul 03 04:03 PM

[fleeing omega:]

Adam, I wish i could provide you with actual numbers, but from talking to people in China, and esp. Beijing, it does appear that affordability is already well above sustainability based on local income levels and therefore predicated on speculation and ever rising prices. A relatively small and dreary apartment can easily cost average west coast prices, and something newer even more.

In fact Beijing housing has smelled like a bubble to me for several years and I am guessing the reason it hasn't hit the fan relates to stimulus getting redirected back into even more RE building and speculation, as others have mentioned.

I am really surprised this has blown up yet, but when things go parabolic it is only a matter of time before something has to give. That said, the government has a greater involvment in the economy over there, so on the way down things may follow the dynamics of a free market to an even lesser than they are here (eg, foreclosure moratoria, etc, etc) .


On Jul 03 11:14 AM Adam855 wrote:

> Definitely sounds bubbly, but I'd like to see affordability measures
> prior to concluding anything. Does anyone have data that could help
> with this?

Jul 03 05:22 PM

[Moon Kil Woong:]

LOL so much for communism. An economy that makes property unaffordable has been the central focus of economists, philosophers, and populists. If you didn't make money by people a party person, speculating on property (playing the greater fool theory), or running a company taking advantage of the cheap labor of your country and undervalued currency it will be a very cold day in hell before you could buy property in a metropolitan area in China. Wealth distribution there is worse in terms of standard of living than America and is close in terms of sheer monetary disparities.

China should take a clue from the rest of the world and accept economic cycles and stop massive bubbles. However, so far why ruin a decade plus long run.

Does that sound familiar? Ours wasn't a decade but we also had a nagging thing called a balooning deficit, a trade deficit, and negative real consumer savings. It's a wonder our run lasted as long as it did (mass spending and terrible Fed low rate policies can do wonders). When China eventually hits a recession who can say what will happen. It appears the "socialist" party leaders don't want to find out anytime soon. A Tienamen Square episode replaced with starving homless people could shape up to be a lot worse. Especially when socialist party leaders drive rolls royces and have a few US$ million to each of their names. The contradictions are glaringly apparent. The sooner they move towards democracy and a ideology that fits their behavior the better off they will be.

Jul 03 11:03 PM

[derryl:]

As part of their stimulus package Chinese bankers have been ordered to increase loans; i.e. to engage in an easy money credit expansion. Any time credit is rapidly expanded the money ends up going overwhelmingly into bidding up the prices of existing assets, mostly stocks and real estate. I am really kind of surprised that the normally conservative Chinese leaders have fallen into the same easy money error that concentrates an economy's wealth into the hands of lenders (who collect fees and interest) and early borrowers (who can buy in before prices start getting bid up) at the expense of real economic growth.

Jul 04 09:30 AM

[Dave Wrixon:]

No, I am closer to you than you think.

America has to wake up and smell the coffee. They either have to compete on a global stage or turn inwards and shut themselves off, but that in itself will require a greater degree of self-sufficiency than they do now. The third way is to simply become the World's largest banana republic with two or three secessionist struggles going on simultaneously.

My view it that it would be preferable to attempt to compete, but I can respect the "Its my ball, and I am going home strategy". At least these approach is intellectually consistent and honest.


On Jul 03 04:03 PM LilBob wrote:

> "...Whilst the money is being spent investing to satisfy the needs
> of a rapidly expanding middle..."
>
> We ascribe to different notions regarding the outcome of globalization
> Dave. You're apparently on-board with those who think there will
> be benefits that raise all ships, while I'm on the side that believes
> that globalization will result in working people all over the world
> ending up in the same boat as John Steinbeck's "Okies," from the
> Grapes of Wrath. China will never have a burgeoning middle class,
> because financial capital will abandon the Chinese as soon as costs
> in that country rise beyond a certain thresh-hold.

Jul 04 09:39 AM

[Dave Wrixon:]

No, China can afford to take a different approach because they can let their cost escalate quite a lot without becoming uncompetitive. The problem that the US has is that even if they reduce their considerably, they will have to come a long way down before it is going to have significant impact.


On Jul 03 11:03 PM Moon Kil Woong wrote:

> LOL so much for communism. An economy that makes property unaffordable
> has been the central focus of economists, philosophers, and populists.
> If you didn't make money by people a party person, speculating on
> property (playing the greater fool theory), or running a company
> taking advantage of the cheap labor of your country and undervalued
> currency it will be a very cold day in hell before you could buy
> property in a metropolitan area in China. Wealth distribution there
> is worse in terms of standard of living than America and is close
> in terms of sheer monetary disparities.
>
> China should take a clue from the rest of the world and accept economic
> cycles and stop massive bubbles. However, so far why ruin a decade
> plus long run.
>
> Does that sound familiar? Ours wasn't a decade but we also had a
> nagging thing called a balooning deficit, a trade deficit, and negative
> real consumer savings. It's a wonder our run lasted as long as it
> did (mass spending and terrible Fed low rate policies can do wonders).
> When China eventually hits a recession who can say what will happen.
> It appears the "socialist" party leaders don't want to find out anytime
> soon. A Tienamen Square episode replaced with starving homless people
> could shape up to be a lot worse. Especially when socialist party
> leaders drive rolls royces and have a few US$ million to each of
> their names. The contradictions are glaringly apparent. The sooner
> they move towards democracy and a ideology that fits their behavior
> the better off they will be.

Jul 04 09:42 AM

[Sober Realist:]

I have a few eye-popping stats on the China bubble:
"The China Statistics Yearbook 2008 found that the average home price in Beijing was 23 times a local family's average income, compared with the international level of four to six times.

In Guangzhou, a recent online poll by leading portal Sina.com showed that 78 percent of respondents consider the city's home prices to be far beyond the affordability of ordinary families.

"I just can't understand why our provincial government has issued a string of policies earlier this year to prop up the real estate industry while so many people cannot afford to buy a home," said Yang Anjing, an employee with a consulting firm in Guangzhou."
rol.vn/weben/banin/tin.../

"It is estimated that there are vacant areas of 160 million square meters across the country. To reduce the current stock is a priority. Take Beijing for example, by the end of March, existing vacant commodity housing areas reached 14.372 million square meters, an increase of 34.5% over the same period of last year and it would at least take 13 months to digest the stock."
www.chinastakes.com/20...

"Half of the 5.8 trillion yuan (£522bn) of stimulus loans issued by Chinese banks have flowed into the country's stock and property markets, inflating new bubbles, according to senior Communist officials."
www.telegraph.co.uk/ne...

When the 4.57 trillion yuan stimulus wears off and the China bubble pops, it will have massive ramifications for the global economy.


On Jul 03 11:14 AM Adam855 wrote:

> Definitely sounds bubbly, but I'd like to see affordability measures
> prior to concluding anything. Does anyone have data that could help
> with this?

Jul 04 04:19 PM

[LilBob:]

Dave Wrixon Wrote:

"My view it that it would be preferable to attempt to compete, but I can respect the "Its my ball, and I am going home strategy". At least this approach is intellectually consistent and honest."

I may have presented my beliefs a bit too strongly. I believe in competition also. But I've also become aggravated at how easily this country was sold on globalization. Apparently the Chinese have become sold on it also. China is in great danger from any type of speculative bubble at this point-especially if keeping up with cost-bubbles leads factory owners to hike their bids on Western retail contracts. From ports on the West coast it's a matter of just a few degrees and one ends up in Vietnam rather than Shanghai.

Jul 04 10:09 PM

[coreopsis:]

I don't suppose it would help at this stage in the game to suggest you take a course in economics..even at your high school if they offer it. You seem to be entirely dumbfounded by high prices, and the fact that building is increasing. Here's a clue: prices are often determined by SUPPLY AND DEMAND (a novel concept perhaps).

I realize you're a Yank, but not all buying takes place because people want to speculate. The market demand is enormous as people had no right to private ownership of housing under the Communists.

To speculate, you'd have to follow the American model: (1) have no equity; (2) borrow at least 90-95% of the cost of the housing; (3) lie on your income; (4) try to flip the house and double your money.

If you indeed have 'friends' in China, why don't you ask them how people buy houses? The answer, my luckless friend, is 'CASH'.

You really need to start a serious investigation of what speculation is...and I suggest you begin by looking the definition of 'leverage'. I'm glad you spelt the word properly, but now seek to find out its meaning and mechanism.

BTW, bubbles don't smell unless you're not talking about economics.

On Jul 03 05:22 PM fleeing omega wrote:

> Adam, I wish i could provide you with actual numbers, but from talking
> to people in China, and esp. Beijing, it does appear that affordability
> is already well above sustainability....

Jul 04 11:33 PM

[coreopsis:]

Well I guess you're right....Vietnam (population 86 mil) will definitely have the ability to displace China (pop 1.3 bil) as a manufacturing economy. Bob, we know you have a map. Now's the time to invest in an encyclopedia.


On Jul 04 10:09 PM LilBobby wrote:

>
> From ports on the West coast it's a matter of just a few degrees
> and one ends up in Vietnam rather than Shanghai.

Jul 04 11:37 PM

[coreopsis:]

Really hoping you're going live that long. It's been 30 years already without recession. Good luck.


On Jul 03 11:03 PM Moon Kill Wrong wrote:

> LOL so much for capitalism. An economy that makes property unaffordable
> has been the central focus of economists, philosophers, and populists.
> If you didn't make money by being an elected politician on the take, speculating on
> property (playing the greater fool theory), or running a company
> taking advantage of the enormous leverage available from banks whose losses are sustained by taxpayers, it will be a very cold day in hell before you could buy
> property in a metropolitan area in US. Wealth distribution in the US by international measurements is worsening at the most rapid rates in the world [snip]

> When China eventually hits a recession who can say what will happen.

Jul 04 11:52 PM

[mariocavolo:]

you wrote...."China will never have a burgeoning middle class, because financial capital will abandon the Chinese as soon as costs in that country rise beyond a certain thresh-hold. "

My friend you apparently don't live here in China along with us expat business people who've been here for 5-10 years.....China's burgeoning middle class is numbered somewhere between 100-200 million depending on whom you might ask, have more cash than you could ever imagine, no credit card debt...NONE, own their new cars without loans, own 80% of their homes without mortgages...

Also, your suggestion that financial capital will bail as the unavoidable inflation pushes up costs....a silly notion....multinational FDI came here for the long haul, knowing the inflationary scenario that comes with an expanding nation, not to bail. Even as costs double, they are still relatively low. Admittedly, the cost increases will cause some outflows into India, etc, but not much as a percentage.....Cheers, Mario, sanyaexpat.com


On Jul 03 04:03 PM LilBob wrote:

> "...Whilst the money is being spent investing to satisfy the needs
> of a rapidly expanding middle..."
>
> We ascribe to different notions regarding the outcome of globalization
> Dave. You're apparently on-board with those who think there will
> be benefits that raise all ships, while I'm on the side that believes
> that globalization will result in working people all over the world
> ending up in the same boat as John Steinbeck's "Okies," from the
> Grapes of Wrath. China will never have a burgeoning middle class,
> because financial capital will abandon the Chinese as soon as costs
> in that country rise beyond a certain thresh-hold.

Jul 06 01:47 AM