Writing Blog

September 8, 2010

The Chinese Housing Bubble

Filed under: Finance — Rafael Minuesa @ 2:41 PM
Tags: ,
This is one of a series of articles I posted at the Mortgage Girl Blog.
You can view the original version at: 

chinese skyscrappersAn estimated 64 million apartments and houses sit empty in China today. That number is almost two times the population of Canada, but if we consider that each of those properties is the average dwelling for a typical Chinese family of three (parents and one child), all those vacant apartments and houses could accommodate almost 200 million people, which is the equivalent of two-thirds of all U.S. souls or more than 15% of China’s 1.3 billion population.

Escalating prices in China have transformed the country within two decades from a landscape of modest houses and huts next to vegetable fields to modern houses and skyscrapers scattered all over the country, specially in major urban centers like Shanghai and Beijing. Statistics from Goldman Sachs showed that over the past six years, housing price hikes have outpaced income rises by 30 percentage points in Shanghai and 80 percentage points in Beijing. In Beijing, the housing price of per square meter is as much as a resident’s seven months’ salary on average.

The Chinese property market has set new record highs after the government unleashed $1.3 trillion in new bank lending to counter the global recession. The nation’s real estate and stock markets are a “bubble” that will burst when inflation accelerates in 2011, as described by former Morgan Stanley chief Asian economist Andy Xie:

“China’s asset markets are a Ponzi scheme,” said Xie, now a Shanghai-based independent economist. “Property is heading for one huge bust that will take a year and a half to unfold.”

Premier Wen Jiabao said late last year that property speculation must be suppressed, and the government proceeded to reinstate a sales tax on homes sold within five years of purchase after reducing the period to two years in January 2009. These new regulations are meant to address the escalating price trend, although many analysts doubt they will have any real effect. Take for example Gloria Gu, who paid $483,000 in mid-2009 for an apartment near Shanghai’s financial district so her 3-year-old son could attend one of the city’s best kindergartens. Six months later, a similar place in her building sold for $615,000.

Borrowers are maxing out all available lines of credit, fearing that they might miss out on this extraordinary opportunity. Luo Yan and her husband took out the maximum amount of money possible, a story reported by the China Daily: “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.” As Luo put it, “I am afraid that if we don’t do something now, we will certainly miss the boat.”

But there are also demographic factors. Due to the shortage of women, men in China feel they need to buy a home in order to get married. And the harsh truth is that it certainly makes them look like better candidates.

The government is aware of the situation and is ostensibly trying hard to prevent a financial bubble, warning banks to increase their deposits and capital on hand in a bid to control lending. They’re also putting restrictions on property purchases. Any resident trying to purchase a second home in China will require a minimum 40% down payment, which is clearly aimed at preventing a situation similar to that of the U.S. in recent years.
On July it quashed rumors that real estate curbs will be loosened and that restrictions on banks granting mortgages for third homes could soon be relaxed. Rumors were swirling with China Daily headlines like, “Third-home mortgages back in some big cities.” The paper reported that, “After banks in Shanghai, Nanjing and Hangzhou started to give out loans, their counterparts in Beijing and Shenzhen also reopened the business to lend money to those who wish to buy a third home.” But the Chinese banking regulator insists there was never any break in the policy restricting the number of home purchases allowed, reporting that a statement from authorities said, “Commercial banks need to carry out current policies strictly.” The Ministry of Housing and Urban-Rural Development also reiterated that it will maintain curbs on speculative purchases and increase market supply, countering all those media reports.
Will the Chinese government succeed in curtailing this worrisome trend that has brought down to its knees the economies of other Western countries? Hard to tell yet. The Chinese have pulled off some extraordinary feats and have succeeded in some economic areas where many others have failed. If they do manage to pull through this one, the West would certainly have lots to gain by being willing to learn a lesson or two from the East.

Read more:

Also from the Wall Street Journal:
China’s Looming Real Estate Bubble


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