China Housing Bubble
To those who would doubt that there is a housing bubble in China, there is both anecdotal and hard evidence. The anecdotal evidence is right before your eyes if you already live in China: huge new developments with tiny occupancy rates. The newly built financial center of Shenzhen in Southern China is a prime example of this. Plenty of new buildings with few people actually living within the new developments. The other anecdotal evidence of a bubble in China housing prices is that absolutely no one considers real estate to be a risky investment, except the Chinese government, that is.
China Housing Bubble Late 2007 Update: Suzhou
Curious whether the skyrocketing prices in Shanghai where the greatest, percentage wise, in this area of China, I went ahead and asked around in Suzhou.
Apparently, housing prices in Suzhou averaged about 500 RMB per square meter six or so years ago. Now, the average seems to be hovering around 7-8000. A rise of 14-16 times, which is even greater percentage wise than the increase in Shanghai housing prices talked about below:
Mid 2007 Update: Shanghai Real Estate Bubble: Best Example of China Property Bubble
The numbers below are not convincing enough. You might want to see numbers that just scream “China Housing Bubble”. Well, here they are:
At the low point in the late ’90s, much of the prime real estate in Pudong was selling for 1000-2000 RMB per square meter. Today, decent real estate in Pudong starts at 13,000 RMB per square meter. Residential apartments near the famed Oriental Pearl Tower goes for over 100,000 RMB per square meter.
Amazing what a decade’s time will do, isn’t it?
Of course, a lot of development has occured in Pudong to support rising prices. It’s just a question of whether the prices should have risen 3-4x or 8-12x (or much, much more). The truth is, many Chinese people in Shanghai could not afford to buy the houses they own if they were forced to on the open market today. Most young people stand an even smaller chance of affording their own places.
Simply put, housing is out of reach to most people in today’s Shanghai. This can’t last.
When your Girlfriend’s Parents Push you to Buy, There Might be a Bubble
Even though I am an expat, my girlfriend’s family has repeatedly encouraged me to buy a piece of property in Southern China (Shenzhen). Let’s see some reasons why it doesn’t make sense for me to buy:
- I don’t know exactly how long I will be in China, nonetheless Shenzhen (update: I now live in Shanghai)
- There is a tax of 3% on the sale of a property in China within 5 years time of its purchase (recently raised from 2 years, which itself was a new policy)
- There are real estate agent fees and other, smaller, taxes.
Despite the above reasoning, they still think it is a good idea for me to buy real estate in China. Her Mom was even willing to go half and half on the down payment (now that’s a sticky situation, don’t you think? Beyond the point, it is very hard for expats or Chinese people to bring money back out of China).
The Chinese Government Thinks China Housing Prices are too High
The Chinese government is on my side. Over the past year plus, they have issued warning after warning, along with regulation after regulation, aimed at slowing down what they see as overbuilding and a price inflated Chinese real estate environment. The tax mentioned earlier is just one such regulation. Other regulations influence expats ability to buy property in China. They generally must buy for residential purposes. An excerpt like the following, also from China Economic Review, hints at many more reforms not mentioned here:
Some 35.4 percent of visitors to a housing show in Beijing said they would suspend their house-buying plan after the central government took a series of measures aiming to rein in the skyrocketing house prices.
The main issue with housing prices, of course, is affordability. Prices can get into a bubble like state like they have in China, but they can only increase at rates far above average for so long. At some point, the music stops and no one can actually afford a home. This excerpt is from the same article, addressing housing affordability in China (Beijing):
The survey by China Index Research Institute, which got 961 valid returns, shows 86.4 percent of the respondents said the current housing prices in Beijing are high and they can not afford a house.
The biggest uncertainty is the likely fallout from the bursting of the US housing bubble. What is going to happen as consumer credit dries up, China is left with a bunch of IOUs from the US government, and both countries enter into recession (which would be the first one for China in a long, long time)? This issue will be addressed in far more depth than is possible in a post such as this, but suffice it to say that the China housing bubble would burst as well. What do you think? Is the US housing bubble real? What about a China housing bubble? I think most of the world is caught up in a housing bubble.