Email from a Chinese on China’s Real Estate Bubble

By Mike Shedlock on 04/03/2010 – 10:12 am PST -- Economy

In response to 10 Signs of Speculative Mania in China “Panda” a Chinese, commented on the real estate bubble in China.

Panda Writes:

I am from China and I am shocked by the real estate bubble in China. Housing in China now is more expensive than in the US, while salaries are way lower than in the US. Housing is out of reach for most wage earners, and more than 80% people in the past year bought houses as an investment.

The common belief is that Government will not let housing prices fall and that the supply of housing is too limited especially in Shanghai and Beijing for prices to fall. Does this sound familiar?

I am one of the few Chinese who believe the China housing price will crash, soon and hard.

I asked Panda for more details and in a followup Email Panda offered ……

Hi, Mish:

I would very much like to share my view of China real estate bubble with you. Also please bear in mind China does not have property tax now. There is talk about it, but no plan right now.

First, please let me introduce myself.

I was born in China, and got my Bachelor degree from Beijing University in 1999. Then, I went to Princeton University and got my Phd in Computer Engineering in 2004. After that, I have been working at an IT company in bay area.

Even though I have been living out of China for more than 10 years, I visit China regularly and contact my family on a weekly basis. Hence, I have a good understanding of what is going on in China, and in US.

The real estate bubble in China is enormous, and even out of the control of government. Here are a few questions and answers.

1. How big is the real estate bubble?

My home town is a second tier city with a population of around 1 million

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MMM A Canadian in Beijing

Well I don’t think there is a bubble as of yet, though certainly the housing market is frothy in some of the big cities. You have to remember that 1,400,000,000 or 1.4 billion people in China would all love to live in Beijing, Shanghai, Shenzhen, Guangzhou etc… so everyone who is able is trying to buy in the popular areas. 1.4 billion people can not all live inside 4th ring road in Beijing, not enough space. So I think it is good the core areas are too expensive for most ordinary folk (New York is the same). Beijing and all the other major cities are expanding subways and transportation systems so people can move out into the suburbs and satellite cities.

Most of China’s population is rural and is in the process of relocating to urban areas. This urbanization process will take another 40-50 years. Housing pressure is not going to abate anytime soon, barring another world downturn.

There is a major push to also develop the south, west and north – not just the east coast, which is good!

The stimulus plans of the economic crisis era and other imbalances are being adjusted to correct overheating as the economy comes back online. The government is following this closely and making necessary changes.

What you are seeing now are slight temporary imbalances. There will be a slow down now with perhaps some slumps and bumps over the next 6 months to a few years. However, as long as the government continues to monitor the issue and keeps the economy on a basically even keel, then I think there will not be any major hiccups, at least not from inside China. As the economy grows housing prices will follow. Urban development will continue.

By the way Beijing and Shanghai are still way cheaper then New York and London – check out the Knight Frank report … housing in Beijing is still about 25% of that in either of those places. (New York – London – Paris etc…)… like 15-20,000 RMB per square meter compared to 60-80,000 or more for the other world cities …

A Canadian in Beijing MMM
Housing Bubble in China MMM A Canadian in Beijing

Well I don’t think there is a bubble as of yet, though certainly the housing market is frothy in some of the big cities. You have to remember that 1,400,000,000 or 1.4 billion people in China would all love to live in Beijing, Shanghai, Shenzhen, Guangzhou etc… so everyone who is able is trying to buy in the popular areas. 1.4 billion people can not all live inside 4th ring road in Beijing, not enough space. So I think it is good the core areas are too expensive for most ordinary folk. Beijing and all the other major cities are expanding subways and transportation systems so people can move out into the suburbs and satellite cities.

Most of China’s population is rural and is in the process of relocating to urban areas. This urbanization process will take another 40-50 years. Housing pressure is not going to abate anytime soon, barring another world downturn.

There is a major push to also develop the south, west and north – not just the east coast, which is good!

The stimulus plans of the economic crisis era and other imbalances are being adjusted to correct overheating as the economy comes back online. The government is following this closely and making necessary changes.

What you are seeing now are slight temporary imbalances. There will be a slow down now with perhaps some slumps and bumps over the next 6 months to a few years. However, as long as the government continues to monitor the issue and keeps the economy on a basically even keel, then I think there will not be any major hiccups, at least not from inside China. As the economy grows housing prices will follow. Urban development will continue.

By the way Beijing and Shanghai are still way cheaper then New York and London – check out the Knight Frank report … housing in Beijing is still about 25% of that in either of those places. (New York – London – Paris etc…)… like 15-20,000 RMB per square meter compared to 60-80,000 or more for the other world cities …

A Canadian in Beijing MMM
Vincent911

I live in Shenzhen, China for the last 20 years.
I agree with MMM the housing market is frothy in some parts of the big cities. Otherwise house is still affordable for most people.
ShanghaiJoe

Typically property owners will say no bubble, and wishful owners will say bubble. I am an owner so I am biased. In actual fact I think property prices nationwide are relatively high compared to annual income. I also think that you cannot compare China vs other nations since it is clear to me that the Chinese put homebuying at the top of their priorities, and may spend only on bare necessities in order to save up to buy a home. With the urbanization story combined with the China growth story, this makes for a compelling arguement to invest in prime residential real estate. Although prices in the suburbs may be nearing bubble territories, I do think there is no better investment than Shanghai’s Pudong district or the Financial district in Beijing since space is limited, and it is clear that these two areas will continue to attract more residents in the lead up to 2020.
Taipeir

As a businessman that lives in Asia and travels around China I think the views of local foreigners in China are warped by the media, other foreigners and Chinese around them and the constant growth they have seen in the last 10 years. The same with most Chinese although some have admitted to me they think it is a bubble. Nationalism plays its part…China won’t be like the others.

It is a classic bubble. I have travelled through many 1st and 2nd tier cities, without exception, every city has a huge building boom. I have driven from Hangzhou airport to the city centre, I asked the taxi driver why was there no lights in any of the houses, he told me ‘they all went to bed early’ in Chinese. Funny thing I believed him until I realised they were all empty houses as I drove by in daylight the next day. Many people don’t like to admit these things to foreigners.

This is a bubble and it will bust just like every other bubble in history.

There is a myth that everybody in China wants to move to Shanghai, Beijing, Shenzhen. Sorry, not true. It is too expensive and too far from their homelands, they don’t have residents rights there also, provincial cities will offer attractive options for rural migrants.

China has reached it’s demographic peak due to 1 child policy, less young people are coming through now also.

The main reason why it is a bubble though is the low earning power compared to apartments costs…ratios of 25:1 is a big indicator. It is propped up by cheap credit, when money gets more expensive (i.e. interest rates go up) how can they pay their loans back on those paltry incomes, they can’t sell to somebody else as nobody will buy in a falling market.

Bubblicious.