China Housing Market: It's 2005 All Over Again

What Americans wouldn't give for a chart of home prices that looks like the one below from this report in CHINADaily. Granted, a year-over-year increase of 3.9 percent isn't much compared to what was seen during the halcyon days of the global credit bubble a few years ago, but for 2008 to 2009, it's pretty good.

The cost of a home in China rose sharply in October, with the price surging up at its fastest rate for 14 months.

According to the National Bureau of Statistics (NBS), property prices in 70 Chinese mainland cities rose by an average of 3.9 percent when compared to their price last October.
Nationwide, the price of new homes rose in 62 cities in October compared to a year earlier. Guangzhou reported the biggest rise - 12.1 percent - followed by Jinhua, Zhejiang province, which jumped by 11 percent.

As a point of reference in the U.S., as of August, the 20-city S&P Case Shiller Home Price Index was reported at about 11 percent below year ago levels.

It's nice to see that, in some parts of the world at least, the housing bubble has not died a complete death. In fact, in parts of China, it appears to be alive and well.

Experts say property prices - especially in Shanghai - could continue to go up at a fast rate during the next few months because of a buying spree triggered by talk of the possible removal of the favorable mortgage policy.

Fang Xinghai, director of Shanghai's financial services office, suggested at an annual financial meeting last Monday that the government might be prompted to tighten its loose monetary policy in a bid to clamp down on excessive speculation. Experts fear such speculation could feed a property market bubble.

Fang's observation was taken seriously by many would-be homebuyers.

Thirty-year-old Luo Yan and her husband raced to complete the purchase of a three-bedroom apartment in Shanghai with the help of an 800,000 yuan ($117,000) mortgage. The amount they borrowed was the maximum they qualified for.

"I am afraid that if we don't do something now, we will certainly miss the boat," Luo said.

Joe Zhou, research head at property consultants Jones Lang LaSalle, said in the following months, "we expect house prices will remain at a high level, bolstered by increasingly strong demand and limited supply."

Joe Zhou sounds a lot like a 2005-era David Lereah of the National Association of Realtors.

Comments

[Davewmart:]

Just to be clear, asset bubbles whether Chinese or American impoverish those not in the connected elite - they don't help them.
What is happening here is that holuses are getting less affordable for most Chinese people, not more.
The American's who would cheer rises in house prices do not include those who do not own one.

Nov 12 03:22 PM

[James Lewis:]

No housing bubble, cost is at fair value.

The hot money flows that will come into China over the next 3 months will take propertyt up another 10-15%. Anymore than that then we can say property is above fair value. Not a bubble..

Certainly not a bubble, certainly not like USA real estate. In the USA no one would even dream of putting down large downpayment. Here in China downpayment average is around 40-50%. Property would have to drop in excess of 50% for people to be in negative equity and start foreclosure avalanche. Also it is now clear China is the second richest, second most powerful country in the world. Fundamentally prices are fully illustrative of this reality.

I wish people would stop shouting bubble.

Nov 13 03:22 AM

[China Interest:]

James tell me how it isn't a property bubble. Apartment prices in first tier cities are now over 30 X family income. The norm is 4-6 X in most cities around the world, and even in world class cities (where people around the world desire to be in) is around say 10 X.

The reality is that property prices are well ahead of peoples' incomes. The demand that is pushing the prices up is largely speculation.

The rental income on property in China is extremely low even in third tier cities. Thus, the only thing that keeps property prices going higher is the herd mentality that asset prices will continue to rise. This is on the perception that people from rural regions will move to urban regions, and incomes will dramatically rise. However, the people moving to 1st to 3rd tier cities cannot afford anywhere near current prices, and family income for the vast majority of people won't catch up to current property prices for many years to come.

We now have the easy lending money from the State banks going to the SOEs who without having anywhere else to park the money in - park it in real estate, and property development. The upper middle income bracket have been already pushed out of the market.

There are many properties throughout China that remain sold but unoccupied. There are literally thousands of apartment blocks sitting empty without occupants. The numbers of empty flats just keep rising. This is a ponzi scheme that will end very badly.

On Nov 13 03:22 AM James Lewis wrote:

> No housing bubble, cost is at fair value.
>
> The hot money flows that will come into China over the next 3 months
> will take propertyt up another 10-15%. Anymore than that then we
> can say property is above fair value. Not a bubble..
>
> Certainly not a bubble, certainly not like USA real estate. In the
> USA no one would even dream of putting down large downpayment. Here
> in China downpayment average is around 40-50%. Property would have
> to drop in excess of 50% for people to be in negative equity and
> start foreclosure avalanche. Also it is now clear China is the second
> richest, second most powerful country in the world. Fundamentally
> prices are fully illustrative of this reality.
>
> I wish people would stop shouting bubble.

Nov 13 04:12 AM

[Glen L.:]

@James Lewis and China Interest:

You both make good points. I think there is a minor bubble effect here, but I also think economic reality will pop it long before it can reach American RE speculation status. Official Chicom statistics aside, there are anecdotal reports of massive overproduction and construction that is far outstripping domestic demand, resulting in thousands of failed businesses, large and small. The Chinese Tiger may turn out to be made of paper -- fiat paper -- after all.

Nov 13 12:01 PM

[evergreen16:]

James,
You sound like a real communist Realtor in China. Talk about affordability - at up to $2 per hour average wage - people are to buy a condo in the communist style concrete cage for $300,000 and put up 50% down?
If you are not a Realtor there, you are insane.


On Nov 13 03:22 AM James Lewis wrote:

> No housing bubble, cost is at fair value.
>
> The hot money flows that will come into China over the next 3 months
> will take propertyt up another 10-15%. Anymore than that then we
> can say property is above fair value. Not a bubble..
>
> Certainly not a bubble, certainly not like USA real estate. In the
> USA no one would even dream of putting down large downpayment. Here
> in China downpayment average is around 40-50%. Property would have
> to drop in excess of 50% for people to be in negative equity and
> start foreclosure avalanche. Also it is now clear China is the second
> richest, second most powerful country in the world. Fundamentally
> prices are fully illustrative of this reality.
>
> I wish people would stop shouting bubble.

Nov 13 12:37 PM

[Sean in CA:]

It's the Chinese housing market, right? The houses aren't made of China.

Nov 14 10:22 AM