China's Growing Property Bubble

Written By Brian Hicks

Posted March 12, 2010

 

 

housing

 

 

“To know the road ahead, ask those coming back”-Chinese Proverb

Now that we’ve had plenty of time to think long and hard about the our own housing orgy, it should be pretty easy for us to spot another one from a mile away.

That being said, here’s a story about our new “capitalist” friends in China that may ring a bell or two.

From the AP by Elaine Kurtenbach entitled: Soaring China home prices thwart ordinary buyers

“The luxury apartment buildings Yang Xuhua passes on her way to work are a daily reminder of her own frustrated efforts to buy a home. Prices for even modest apartments in Shanghai have soared, putting home purchases out of reach for white collar workers and professionals.

Yang and many other young Chinese are finding their aspirations thwarted by an overheated property market that is enriching already wealthy speculators, local officials and other Communist Party allies.

It’s a hard reality for a generation that views home ownership as a given after reforms more than a decade ago created a housing market open to the masses. It’s also a challenge for leaders whose reliance on rising property values and land sales to property developers risks letting the market spiral out of control.

“I sigh at every fancy apartment building I see on the way to work everyday, but that won’t change anything,” says Yang, whose train ride to work at a trading company takes her past legions of high-rise apartment blocks. “My salary increases but it can’t catch up with rising housing prices.”

Rising property prices have underpinned economic growth rates, benefiting local governments that tend to be heavily invested in property development and other related businesses. Land sales often help finance construction projects that are also a lucrative source of income for many officials.

“The central government will say things to please the popular mood, but local governments have way too many vested interests in the property market to make major changes,” said Ding.

Property prices have risen almost constantly since China set up a commercial housing market in the late 1990s, allowing families to buy, at deep discounts, the low-rent government-owned apartments they were living in.

Since then, real estate has burgeoned into one of the country’s biggest drivers of growth, a creator of vast numbers of jobs in construction and related industries and – as elsewhere – a source of much of the country’s wealth.

Rising housing prices have benefited many. But younger Chinese hoping to replicate their parents’ homeowner lifestyles, and the legions of rural Chinese now moving to the cities, are priced out of the market.

A flood of bank lending meant to fend off recession pushed property sales up 75 percent to 4.4 trillion yuan ($644 billion) last year, making China the world’s biggest property market, by some estimates.

In Beijing and Shanghai, residential prices soared to an average of more than 12,000 yuan ($1,700) per square meter, double the level three years ago, according to a December report by U.S. bond manager Pimco.

Expensive luxury units account for the bulk of sales; Pimco estimated that only 10 percent is to the mass market.

But broader moves are needed to reduce risks from property investments made without regard for potential returns, says Tao Wang, an economist at investment bank UBS. She puts the potential for nonperforming loans over the next few years at 2.5 trillion yuan-3 trillion yuan ($367 billion-$440 billion).

“It is critical for the government to manage its macro policy and urbanization process now to avoid runaway lending, investment, and a big land-property related bubble,” she wrote in a recent report.

 

Hmmm…. Now let’s see what we’ve got here:

 

  • A Mc Mansion hungry population-check

  • The “If I don’t buy it now I’ll be priced out forever” mentality-check

  • An abundance of property flippers –check

  • Huge price surges-check

  • Lots of risky loans-check

  • And rising property values that are tied to economic growth—check

It looks pretty bubblicious to me. Welcome to capitalism, comrades.

But hey, if this one blows up there’s always big money for the masses in day trading.

North, South, East, and West, the human condition is the same.

Related Articles:

The China Bubble Debate

Chanos on China

China’s 2012 Crisis

Chanos: The “cracking of state and local municipalities is coming”

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