Email from a Chinese on China’s Real Estate Bubble

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

. The average wage in the city is around $3500/year. Housing costs around $90/sq-feet for a condo or apartment. You don’t have much land for your home, and for even the small land belonging to you, you are only authorized to use it for 70 years. The obvious question is what will happen after 70 years? It seems that nobody really cares: 70 years ago, China was fighting the invasion of Japan in world war II. God only knows what will happen 70 years in the future. And given the quality of the buildings, it is questionable whether or not the building can last 70 years anyway.

The average apartment (1000 sq feet) will cost $90,000. This comparable with US condo prices in a second tier city. The price/income ratio is 25.7 for a single buyer! Even with a two-wage-earner family, the ratio is larger than 10.

For Beijing and Shanghai, housing is much more expensive. In Shanghai for example, the price for decent area is around 30000-Yuan/sq-meter, i.e., around $440/sq-feet. And yes, they are only condos/apartments. Hence, a 1000sq feet apartment will cost around $440,000. Yet the average college graduate earns only $5500/year.

How can they afford it? Short answer is they cannot. For the few who managed to buy in recent years, they dipped into the life-time savings of their parents, or even grandparents. One house deprived several generation’s wealth in this case.

2. How did this happen?

The most important reason is the local governments. They heavily rely on the sale of real estate for their wasteful spending. During boom times, they get huge amounts of money for selling the land, and thus increase government employee’s wages and compensations. It is to their benefit to have a huge housing bubble, and they do everything they can to sustain the bubble.

Another important reason is the government-controlled companies. These companies are a monopoly in China, and can easily get money from state-owned banks. They co-operate with local governments to propel the housing price up. These companies buy land from local governments at an insane price with the money borrowed from state-controlled banks.

The state controlled banks do not care about the risk taking. If the money lent cannot be paid back, the central bank will just print money to clean the balance sheets of the state-owned banks. China did that in the 90s, and they will do it again.

Construction companies also plays a role. They get easy money from banks, and earn a fortune by selling over-priced housing to people.

Thus, the bubble is a result of corruption among local governments, banks, construction companies, combined with Chinese tradition. Lastly, please note the Chinese mindset. Chinese people love to buy houses. In the cities, it is often a prerequisite for a Chinese man to buy a house before marrying a Chinese woman.

3. What will happen?

When I visited my hometown in 2009, I drove around many empty buildings, which are completely dark at night, and could not help thinking how can this possibly end well. The bubble will burst. Government will print money to bail out banks.

4. What will happen to China as a whole?

On one hand, Chinese people are smart and hard working. And they all believe there will be a bright future for them. On the other hand, look at the huge bubble. How can it possibly end well?

If China has very bright future if it can learn from this. Right now, however, my take is that in short term, China is likely to experience a depression.

“Panda”Thanks for sharing “Panda”!

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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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.