Pop goes China’s real estate bubble?

In 2008 I annoyed some of my readers by predicting China would weather the economic crisis better than the US would. I know, the US fundamentals are stronger and China has all these really bad problems, but my argument was relatively simple: China had enough money in the bank to buy itself out of the recession, at least for a few years, while the US, mired in debt, would be in a far less enviable position.

Then I wrote four months ago:

The bottom-line prediction: things will continue more or less the same, with a sharp, painful drop in property prices at some point and a steady decrease in GDP as domestic consumption fails to live up to expectations and deficit spending clogs China’s economic arteries. As always, we’ll just have to wait and see.

Two years earlier I wrote:

Friends have been telling me about the deranged property prices in Beijing, and once again, as with the malls, it just strikes me as common sense that this is not sustainable. And you have to consider all the ripple effects a housing bust would foment – all those migrant workers on construction sites, all the construction machinery makers, the cement and lumber providers, all the ancillary businesses, door-knob makers and house painters.

What Epstein [of Forbes] is describing mirrors to the letter what we saw in the US five years ago, and is even more reckless: flipping properties and creating massive pools of debt and the same insane mass hypnosis: “Property values can only increase!” We all know how that goes.

I do not want to see this happen… But again, my common sense tells me there’s no way he can be wrong. Any student of bubbles, from tulips to dot-coms, can see the gathering storm. I wouldn’t want to be owning any property in China when it meets land.

Now, I’m getting the distinct feeling that the inevitable may not be too far away: China’s real estate bubble really may pop. From Foreign affairs today:

For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred — that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms.

Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months’ worth of unsold inventory in Beijing and 21 months’ worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that “the biggest bubble of the century,” as it was called earlier this year, has just popped, with serious consequences not only for one of the world’s most promising economies — but internationally as well.

The biggest unanswered question is whether existing investors — the people holding all those sold but empty “ghost” condos and villas — will join in the sell-off, which could turn the market’s retreat into a rout.

What makes the future look particularly bleak is the lack of escape routes. If Chinese investors panic and rush for the exits, they will discover that in a market awash with developer discounts, buyers are very hard to find. The next three months will be a watershed moment for a Chinese investor class that has been flush with cash for years but lacking a place to put it. Instead of developing a more balanced, consumer-based economy, an entire regime of Beijing technocrats — drunk on investment-led growth — let the real estate market run red hot for too long and, when forced to act, lacked the credibility to cool the sector down. That failure threatens to undermine the country’s continued economic rise.

Hours after I read that, Paul Krugman’s latest column came out and it is even more pessimistic.

The obvious question is, with consumer demand [in China] relatively weak, what motivated all that investment? And the answer, to an important extent, is that it depended on an ever-inflating real estate bubble. Real estate investment has roughly doubled as a share of G.D.P. since 2000, accounting directly for more than half of the overall rise in investment. And surely much of the rest of the increase was from firms expanding to sell to the burgeoning construction industry.

Do we actually know that real estate was a bubble? It exhibited all the signs: not just rising prices, but also the kind of speculative fever all too familiar from our own experiences just a few years back — think coastal Florida….

Now the bubble is visibly bursting. How much damage will it do to the Chinese economy — and the world?

Some commentators say not to worry, that China has strong, smart leaders who will do whatever is necessary to cope with a downturn. Implied though not often stated is the thought that China can do what it takes because it doesn’t have to worry about democratic niceties.

To me, however, these sound like famous last words. After all, I remember very well getting similar assurances about Japan in the 1980s, where the brilliant bureaucrats at the Ministry of Finance supposedly had everything under control. And later, there were assurances that America would never, ever, repeat the mistakes that led to Japan’s lost decade — when we are, in reality, doing even worse than Japan did.

Let me be clear: I don’t want to see China’s economy slow down, let alone fall into serious recession. There are too many people I love in China and I hate the thought of them, and the rest of the Chinese people, suffering the consequences of such a catastrophe. But I think, especially at the level of local government, that officials are playing with fire, counting on ever-rising property prices to pay for insanely huge development projects. That is a house of cards. It sounds like the US and Ireland and Greece all over again.

The Foreign Affairs article at least ends with a note of optimism:

While frightening, the popping of China’s real estate bubble is not all bad news. Cheaper, more affordable housing could also unlock the savings of China’s working-class families, unleashing greater consumer demand and helping to rebalance the global economy. Investment long bottled up in idle real estate could flow to more productive pursuits. These adjustments have been put off too long. This is why at least some of China’s leaders appear determined to force a correction despite the risks. But they know they are walking a razor’s edge.

I hope he’s right, but wonder if China could pick itself up off its feet so easily if it has a hard landing. I am just hoping the central government has enough control to let the bubble slowly deflate as opposed to popping. This has been the consensus among the more optimistic China pundits, that the central powers can navigate the economy through the most treacherous waters because they control all the levers. Authoritarianism, the argument goes, can get things done, and I agree to a point — but sometimes, as America learned in 2008, forces can gather that simply can’t be controlled and then take on a life of their own. I hope the optimists right.

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Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 48 Comments

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December 20, 2011 @ 12:07 pm | Pingback

The most important distinction, for me, is that China sees this coming. Two weeks before Lehman’s collapsed, Gordon Brown was praising London’s financiers for ushering in a golden age.

There was a strong counterargument made on the Sinica Podcast recently.

December 20, 2011 @ 12:37 pm | Comment

The most important distinction, for me, is that China sees this coming. Two weeks before Lehman’s collapsed, Gordon Brown was praising London’s financiers for ushering in a golden age.

There was a strong counterargument made on the Sinica Podcast recently.

December 20, 2011 @ 12:37 pm | Comment

There are some brighter sides, as the above poster pointed out, the government is not in denial of a bubble, and that generally speaking, there is considerablly less leverage ratio for the homeowners on their properties due to obvious reasons of China’s tight lending policies. of course we don’t (and probably no one really knows) how much the private lending industry extend into the average people, which would be the serious question.

The most serious consequeces is as you pointed out, the potential unemployment wave due to rapid decline in construction projects, that would be truely worrisome, but at least I think it’s less likely that China’s housing bubble would pop in the same way the US onces did (aka too many average folks over leveraging their house holds, which is neither a new phenomenon or completly due to just the housing subprime bubble)

December 20, 2011 @ 4:00 pm | Comment

I think that it is going to be hard to turn the tide. Everyone keeps pointing to the fact that China requires higher down payments on property, but this only accounts for “official” lines of credit. Many Chinese use “unofficial” channels to raise money for their down payment, whether that be loan sharks or family members. For instance, my brother in law’s wife’s family recently pushed the young couple into buying a home in order to get married (despite our suggestion to wait until the bubble burst). In order to raise the money for the down payment, both families had to borrow heavily from friends and neighbors. Now post price drop, my brother in law is on the line for a mortgage based on prices at the height of the bubble for an apartment that is not due to be completed until next year. What happens if this real estate bust ends up slowing or even stopping the project? What about this young couple who barely make more than 5000RMB a month who now owe on an inflated mortgage AS WELL AS all the unofficial debts that they have to pay back? I think that when people say China will be ok because of the high down payment requirement are only considering that upper class that were using real estate investment as a way to park their money. The lower classes as usual are going to be hurting way more than people think. Even if this doesn’t bring down the banks ala the USA crisis, there will be a SIGNIFICANT decrease in wealth all around, resulting in the growth slow down Richard mentions above. It’s a downward spiral and while I do not see a dramatic crash, a lot of people are going to be hurting.

(Even if they decide to re-inflate the bubble which I do not see the central government doing (local probably wants to because this is their cash cow), the model was unsustainable from the beginning and they are only delaying a necessary adjustment and increasing the potential for a bigger catastrophe down the road.)

December 20, 2011 @ 11:56 pm | Comment

As everyone knows, the Chinese government is both benevolent and hyper-competent. It would be impossible for anything bad to happen to the economy because the government will simply engineer a magical solution to any potential economic crisis. The rules of economics do not apply to China. Case closed.

December 21, 2011 @ 1:49 am | Comment

Other Richard, do I detect a note of sarcasm? (I hope so.)

Andy, good points. I don’t see a dramatic crash, but there have to be consequences for allowing — encouraging — property prices to rise so much so fast. I think China is going to feel a lot of pain in the near future.

December 21, 2011 @ 2:58 am | Comment

@Richard (forgot my R the first time around)

The only way I can see it crashing is if their is a panic to sell off, and this is unlikely to happen because a. real estate investments are not like stocks, you can’t just easily move these things, especially in a slow market and b. there is no other place to put your money. Basically most people are just going to have to take the hit and ride the storm out. You will not have mass mortgage defaults by individuals, and even for those that do end up NPL’s the government will step in to bail out the banks like during the Asian financial crisis.

People should look at real estate as a savings account for most people in China. The stock market is too dangerous and low interest rates at banks make them little more than a brick and mortar “mattress” to tuck your bills under, forcing people to stash their savings in an apartment. So with prices dropping, essentially people are losing 20-30% or mor of their savings. The broader effect being most likely that you see a more guarded attitude toward consumption and investment and thus slower growth.

The other flash point might be that this only exacerbates the debt problems of local governments who will no longer be able to rely on land sales to keep their finances afloat.

The next year will be very interesting…

December 21, 2011 @ 3:45 am | Comment

Sorry one other myth I would like to try and debunk: the idea that “urban” migration will somehow close the gap and keep the real estate development engine going for years to come. What these people seem to ignore is the real estate development going on in the countryside as well. Take Guan’nan county in Jiangsu where my in-laws reside. Last time I was there you saw the same type of over development, empty apartment buildings etc. that you see in the cities. I asked people why in a place like Guan’nan (which is 2 hours from the nearest train station, and 1 hour from the nearest airport, and is emptying due to urban migration), why would you need to build swathes of upscale building projects in such a rural area? Their answer was that all those kids who have left would one day come back and invest in these properties…uh-huh. So are these migrant workers going to be wealthy enough to both fill the real estate projects of their adopted cities AND the ones back home in the countryside? Right now, my father-in-law says that they are offering buy one get one free deals to try and move these developments. This in a place that is now mainly inhabited by aging farmers still reliant on agriculture for their income.

I’m admittedly a bear on China, but with situations like the above, I don’t see how one could imagine an “easy” fix to some of the over-investment problems that have been created since all that money was pumped into the economy after 2008.

December 21, 2011 @ 4:25 am | Comment

You also hear about the highways, bridges, and rail lines that have been built to nowhere. There could be a lot of public works construction workers with very little to do now that stimulus money has dried up, to go along with the housing construction workers with little to do with the drop in housing starts.

December 21, 2011 @ 9:13 am | Comment

The rules of economics do not apply to China.

Don’t get too excited, China is massively underbuilt for a nation of 1.3 billion. The people who are hurt here are speculators (including many foreigners). Now younger Chinese can afford housing.

Apparently the “rules of economics” state that 40% or so of the population doesn’t actually need adequate housing.

Richard
I think China is going to feel a lot of pain in the near future.

China already feels a lot of pain now. “Don’t be fooled by Shanghai” etc.

December 21, 2011 @ 1:12 pm | Comment

AndyR
So are these migrant workers going to be wealthy enough to both fill the real estate projects of their adopted cities AND the ones back home in the countryside?

You’re desperate to believe China will crash and burn. Understood. But what you heard from one guy here and one guy there doesn’t mean much. People from poorer regions of the province will likely move near your in-laws while urban migrants move into cities for work, unless you’re implying every inch of China is being massively overbuilt.

Amazing how every single pig farming village can be churning out apartment complexes while simultaneously “flooding” the world market with cheap goods, huh? With that kind of magic going on I’m sure they can figure something out.

That’s generally the pattern. Too little infrastructure, too little housing. Solution? Stop building, why not let your experienced construction workers take a 10 year vacation?

Even in Japan when the “roads to nowhere” were being built (thank you SK, for the tiresome pop-economics lingo) they were getting richer every year. Japan still managed to become one the richest countries in the world ($ assets per capita) while they dumped money into construction projects.

December 21, 2011 @ 1:22 pm | Comment

As a side note, I’d say you’re usually pretty spot-on with these things, Richard. But the data isn’t right here or being applied properly. I think the pure bitterness and suspicion of the West has bled into economics, which fuels this bubble hysteria. Clearly construction in China must die down eventually, but not when barely 30% of the nation has adequate housing or access to decent roads or good sanitation.

Of course some people will try to spin this into me saying that China has no problems or is a utopia blahblahblah, but that’s not quite true.

There’s no reason for these people to get hot and bothered about a bubble in China. People in developing countries (China included) suffer a great deal on a daily basis even neglecting housing. To them, a crash in prices is a blessing.

December 21, 2011 @ 1:27 pm | Comment

@Cookie

First a small correction. Looks more professional.
“As a side note, I’d say you’re usually pretty spot-on with these things, Richard. But the data isn’t right here or being applied properly. ……… . Clearly construction in China must die down eventually, but not when barely 30% of the nation has adequate housing or access to decent roads or good sanitation.
Of course some people will try to spin this into me saying that China has no problems or is a utopia blahblahblah, but that’s not quite true.
There’s no reason for these people to get hot and bothered about a bubble in China. People in developing countries (China included) suffer a great deal on a daily basis even neglecting housing. To them, a crash in prices is a blessing.”

My answer to your comment.

There is a difference between needs and resources available to address those needs. How those resources, not matter if abundant or scarce, are used is also important.

Simplifying a bit. If your home is empty and it would welcome more furniture and/or modern appliances, if you are indebted to the neck or misused your resources, the house will remain empty. And a worst case scenario you may even loose it.
Or more radically, if you are a farmer and you are hungry, if the crop from last year has been sold out, the money you got spend already, and nothing left in the pantry, no matter how hungry you are, or how big are the fields you have, you may still starve.

December 21, 2011 @ 2:45 pm | Comment

About pig farmers.

Entrepreneurship is always Entrepreneurship, it doesn’t matter if applied to pig farming or in manufacturing high end technology products.

December 21, 2011 @ 2:48 pm | Comment

To #12 and 13:
Again, no comparisons necessary. But since you bring up Japan without provocation or any basis in your previously-stated principles, you’ll no doubt recall what happened in the 1990s. More importantly, Japan building stuff to nowhere in particular was not the causal ingredient to them “getting richer every year”.

A “crash” in prices might be a good thing for those not yet in the market…assuming that it actually crashes enough for the market to come within their grasp. But it’s certainly not a good thing for those who are already in the market…especially the leveraged ones. And as AndyR suggests, for the average Zhou, that leverage refers to the stuff that’s on the books to the banks, and likely to stuff that’s off the books as well.

December 21, 2011 @ 2:50 pm | Comment

@Cookie

Just one burning question in my mind. Are you Chinese or (North)American.?

December 21, 2011 @ 2:51 pm | Comment

@Cookie
“You’re desperate to believe China will crash and burn.”

Stop projecting. Why would anyone in their right mind want China to crash and burn? I have family there. Why would I want them to suffer an economic disaster? I also have money in a stock market that would be hit hard by any sort of Chinese economic crisis. Maybe you are right and all those empty properties in the middle of nowhere will be occupied once prices fall. I certainly hope that is the case, but you can’t just dismiss the idea that all that speculation has created dangerous imbalances.

Your habit of equating criticism with enmity is probably one of the biggest reasons why you continue to fall into that “troll” category. Can you make a counter argument WITHOUT blasting someone as “anti-China”?

December 21, 2011 @ 10:24 pm | Comment

FYI China Law Blog’s Steve Dickinson is doing a series on the real estate situation in Qingdao currently, definitely worth a read in companion to this post.

Part 1: http://tinyurl.com/d2mldyx
Part 2: http://tinyurl.com/6nxxd9l

Definitely echoes my thoughts above, but maybe Cookie can enlighten us all with an opposing viewpoint (hopefully without the unnecessary “anti-china” assumptions)

December 21, 2011 @ 11:10 pm | Comment

eco
Are you Chinese or (North)American.?

Neither, technically.

There is a difference between needs and resources available to address those needs. How those resources, not matter if abundant or scarce, are used is also important.

But China isn’t indebted, and neither are its people (the poorest 1% in China does not have negative net worth). Right now there’s simply no way to overbuild infrastructure in China unless the planners are totally incompetent.

SK Cheung
But since you bring up Japan without provocation or any basis in your previously-stated principles, you’ll no doubt recall what happened in the 1990s.

Uh, no. That’s not a comparison, it’s an example. What happened in the 90s was an asset price crash. Japanese GDP has declined because their hours and population has dwindled, not really because a of decline in productivity. Even after the crash Japanese household assets continued to recover. It’s true that their construction industry is a bit bloated but it’s a symptom of them keeping money in the system (domestic blue collar employment rather than outsourcing and importing foreign workers), so yes the two are somewhat related.

But it’s certainly not a good thing for those who are already in the market…especially the leveraged ones.

Except few Chinese households are deep in debt. Those who already own homes and intend to live there for five or more years will not be affected so much. Speculators will, but if you have to choose between the people rich enough to speculate and stupid enough to speculate badly, or the people who just want to buy a home and settle down, I’d pick the latter – especially considering many greedy foreigners are involved with the first group.

AndyR
Stop projecting. Why would anyone in their right mind want China to crash and burn? I have family there. Why would I want them to suffer an economic disaster?

I’m only judging by your posting history, sorry but I can’t wipe my memory clean at will.

Your habit of equating criticism with enmity is probably one of the biggest reasons why you continue to fall into that “troll” category. Can you make a counter argument WITHOUT blasting someone as “anti-China”?

I certainly can, but what I can’t do is whitewash anti-Chinese sentiment as criticism when it’s clearly not.

December 21, 2011 @ 11:13 pm | Comment

@Cookie
Ad hominem as usual. Shouldn’t have expected anything less. Good luck creating havoc in this thread as well buddy.

December 21, 2011 @ 11:58 pm | Comment

Kooky, you are really are absurd. Andy’s history of commenting here is polite and sensible. Why do you have to turn on everyone as being anti-China? (Rhetorical question, because I know there is no meaningful answer you can give. It’s simply what you do by reflex.)

December 22, 2011 @ 12:05 am | Comment

@Richard

Thanks but my fault for feeding the troll. I should’ve known better than to engage with someone who can somehow read the conclusion that “China is going to see slower growth in future” as “China is going to crash and burn”.

December 22, 2011 @ 12:18 am | Comment

The Wukan demonstrations are over, for now.

December 22, 2011 @ 12:23 am | Comment

AndyR
I should’ve known better than to engage with someone who can somehow read the conclusion that “China is going to see slower growth in future”

And who exactly is this presumptuous straw man directed at? I don’t blame you for it, of course, as China commentary is saturated with this fallacy. I keep hearing of these mythological beings who assert China will grow 10% indefinitely until year 6012. Just who are they? Not even the criminally insane suggest that China will keep growing at its current rate for even 5 years.

The whole notion just reeks of reactionary bitterness.

December 22, 2011 @ 12:26 am | Comment

You’re wrong, Cooky. I read an oped about two weeks ago that said precisely that, that China would keep on growing at present rates for years to come. Such articles are not hard to find. Here’s one from Foreign Policy:

In 2040, the Chinese economy will reach $123 trillion, or nearly three times the economic output of the entire globe in 2000. China’s per capita income will hit $85,000, more than double the forecast for the European Union, and also much higher than that of India and Japan. In other words, the average Chinese megacity dweller will be living twice as well as the average Frenchman when China goes from a poor country in 2000 to a superrich country in 2040. Although it will not have overtaken the United States in per capita wealth, according to my forecasts, China’s share of global GDP — 40 percent — will dwarf that of the United States (14 percent) and the European Union (5 percent) 30 years from now. This is what economic hegemony will look like.

Are they criminally insane? I don’t know. But these aren’t strawmen.

December 22, 2011 @ 2:25 am | Comment

To #20:
“so yes the two are somewhat related.”
—which “two” are you talking about? I was referring to incessant building and “getting richer every year”. “somewhat related” is nice, but I was talking about a causal relationship, or lack thereof.

“few Chinese households are deep in debt” is a useless statement. What is few? What is deep in debt? Read what AndyR wrote in #8, will you? If it’s not too much to ask, try to carry on a conversation in light of the conversation that has come before it, especially when I specifically referenced to AndyR’s statements already. Chinese people may not have to walk away from mortgages, but they’ll still be taking a hit essentially to their savings. Sure, it might/will recover over time, but in the meantime, it will affect Chinese people’s spending behaviour, precisely at a time when that is being counted upon to sustain a larger proportion of China’s economy.

Yes, we know about your xenophobia, so screwing “foreigners” is first and foremost on your to-do list. I guess hurting Chinese people as a byproduct is a price you’re willing to pay…or at least a price you’re willing to see Chinese people pay, since you’re conveniently not one of them.

December 22, 2011 @ 3:03 am | Comment

Richard, even taking China’s absolute highest current estimate in GDP in purchasing power (around $15t in 2011), that’s still not 10% growth compounded over 40 years. Growth certainly will have slowed even in his model.

That said I’m reading the article out of curiosity.

December 22, 2011 @ 3:06 am | Comment

Compounded until year ’40**

December 22, 2011 @ 3:06 am | Comment

SK Cheung
“few Chinese households are deep in debt” is a useless statement. What is few? What is deep in debt?

I should have said “the average Chinese household” has 0 debt. I stated it lightly because “no one in China has any debt” is clearly not true.

Chinese people may not have to walk away from mortgages, but they’ll still be taking a hit essentially to their savings.

Most Chinese people are not speculating. If “overbuilt” cities take a hit, everyone who doesn’t own something now has more options on the table. If you’re implying that you’re going to see 30-50% drops in price at the rural level I would like to see the data. This isn’t a challenge, just curiosity.

I guess hurting Chinese people as a byproduct is a price you’re willing to pay…or at least a price you’re willing to see Chinese people pay, since you’re conveniently not one of them.

It doesn’t “hurt Chinese people”. It’s destabilizing, but in the long run there is no net loss to the “Chinese people” as a whole, especially not the poor or the middle class. When greedy foreign speculators lose their money in the Chinese market, the Chinese people gain as the raw materials and labor are partially covered by the funds.

December 22, 2011 @ 3:10 am | Comment

A bit off-topic, but definitely adjacent to the discussion.

Talk about an absolute recipe for disaster and a sign of desperation.

http://www.google.com/hostednews/afp/article/ALeqM5j3B1zjKLIsOBJigKeJMQaNNdjEHg?docId=CNG.ea8fa14ec58d32430d4daba1f88f4a9e.a21

Pension funds to be be invested in shares by local govt.

“Nearly all the pension funds in the world invest in the stock market,” Dai was quoted saying.

“I think it is OK to allocate part of the pension funds managed by local governments to buy stocks. This will help preserve and increase the value of pension funds.”

A local fund manager told the Shanghai Securities News that the latest injection of funds suggested the government believed the market had nearly bottomed and there was “long-term value”.

Yes, and my cat plays chess.

December 22, 2011 @ 5:32 am | Comment

It says 1.6 billion, not 1.6 quadrillion. I’m not getting your point.

December 22, 2011 @ 5:39 am | Comment

http://en.wikipedia.org/wiki/National_Council_for_Social_Security_Fund#Size_of_the_Fund_and_Asset_Allocation

As of Dec. 31, 2009, the total asset under management of the National Council for Social Security Fund (SSF) stood at RMB 776.5bn, among which RMB692.7bn are NSSF equity capital. Among different asset categories, fixed income took up 40.67%, domestic stocks 25.91%, global stocks 6.54%, equity assets 20.54%, cash equivalents 6.34%.

That’s like 1% of the fund. PANIC! CHINA COLLAPSE IMMINENT!

December 22, 2011 @ 5:41 am | Comment

“I should have said “the average Chinese household” has 0 debt”
—is that actually true? And for purposes here, I’m talking non-mortgage debt. And are you saying “average Chinese household”, or “Chinese households on average”?

I agree that local speculation may not be abundantly prevalent. But I don’t think speculation in the housing market is the foreigner-dominated phenomenon you try to suggest.

December 22, 2011 @ 5:58 am | Comment

SK Cheung
is that actually true? And for purposes here, I’m talking non-mortgage debt. And are you saying “average Chinese household”, or “Chinese households on average”?

They essentially mean the same thing, but yes. Your typical Chinese household has positive net worth.

But I don’t think speculation in the housing market is the foreigner-dominated phenomenon you try to suggest.

It isn’t, but there is a significant presence. If an investment “tanks” all speculators will take a loss but any money that flowed into the country from outside registers as net gain for the typical Chinese person that can’t afford fancy houses.

December 22, 2011 @ 6:20 am | Comment

Cookie
“Clearly construction in China must die down eventually, but not when barely 30% of the nation has adequate housing or access to decent roads or good sanitation.”
Yes, indeed – but these need money….mostly borrowed. Those that lend tend to want it back and when they can’t get it back, that’s when things get all….well, European, for want of a better analogy. No one wants China to crash and burn, except those kinda like the extreme pro-CCP commeters here but polar opposite, as too many economies have put a few too many of their eggs in the Chinese basket.
I also read with interest about these normal Chinese that pay all that cash for a house/flat in China. All the ones I know can’t really stretch that far (this is in Nantong) as the prices are just that little too high. From reading the comments in western media and in sites like this, some of the more sinistically optimist people would have me believe my in laws and their friends and acquaintances are the exception. Only my brother in law and his wife seem to have got on that gravy train…and that needed as much connections as money.

December 22, 2011 @ 7:32 am | Comment

Mike
Yes, indeed – but these need money….mostly borrowed.

Then what is the government doing with the 8-10 million units of public housing built every single year? Gouging people for profit? It doesn’t add up.

One key point contra the “bubble” opinion is that most Chinese pay for their houses with minimal debt-leveraging and then live in them as would be expected from a developing nation.

The whole idea that a nation where the typical person is worth only $16,000 US can have a wide-reaching financial collapse is simply mind-boggling. I can only guess that the people who write this stuff have never been in rural China. I never saw a laowai there, anyway. They talk the talk about caring about China’s poor, but can’t be damned to actually see them in person – or donate any money.

December 22, 2011 @ 7:42 am | Comment

The Chinese RE market is popping, but we do not hear much about it, because in China:
1. Underwater mortgages: rare.
2. Home equity loans: little
3. Mortgage backed securities (MBS): none
4. CDS (like insurance) for MBS.

In the US, RE market collapse triggered all 4, but it is 2, 3, 4 that brought the financial crisis. MBS and sloppiness in record keeping made it difficult to sort out who owes what. At the peak of crisis, CDS liabilities alone exceeded $60 trillion.

Furthermore, in China:
Auto loans: little
Credit card debts: little
Educational loans: little

December 22, 2011 @ 8:50 am | Comment

“They essentially mean the same thing,”
—actually, “Chinese households on average” would refer to the mean, whereas “average Chinese households” could refer to median or perhaps even mode. And unless it’s a standard distribution, which it obviously won’t be, those do in fact mean quite different things.

It’s again unclear what you mean by “typical Chinese household”. In any event, if you’re talking net worth, then you’re including their primary residence (and whatever mortgage they had on it). A drop in housing prices means home owners see their net worth going south, much like the analogy with the house representing the savings vehicle for Chinese people. I don’t know what the “typical” debt is for Chinese people, nor what you base your assessments on with “0 debt” and “positive net worth”. But my point is that whatever it is, they’re worth less now, and that has implications on spending patterns right when the Chinese economy needs her citizens to be spending more.

I agree that when investors sell while the vehicle is in a loss position, they lock in those losses. But those losses benefited the developer to whom the investor initially paid the higher price. I don’t know how much of that trickles down to the “typical Chinese person”.

December 22, 2011 @ 9:58 am | Comment

If you were to say “typical Chinese household”, that would be the median. Semantics aside, afaik real estate accounts for around 2/3rds of the average Chinese person’s net worth, the remaining 5000ish being mostly liquid.

The thing is that those who are worse off financially are also the least exposed to the most “overpriced” areas.

But my point is that whatever it is, they’re worth less now, and that has implications on spending patterns right when the Chinese economy needs her citizens to be spending more.

Except it hasn’t been established that there will be a bubble “popping”, because their purchases are not heavily leveraged as in the US and Japan in the 80s, and because China is simply underbuilt.

The reason why I brought up the household balance sheets was to demonstrate that point.

December 22, 2011 @ 11:35 am | Comment

Median is the better metric since it is less affected by outliers, in any data set exhibiting a non-standard distribution.

“The thing is that those who are worse off financially are also the least exposed to the most “overpriced” areas.”
—that’s true. In fact, regardless of price point, anyone who doesn’t own property will be less negatively affected by a softening of property prices than those who do. So we’re only talking about property owners here.

The degree of leverage doesn’t matter. Even if a person had clear title and was mortgage-free, a softening of real estate prices means a drop in their net worth (and for many Chinese, a shrinking of their savings). I’m not talking about the need to sell at a loss, or to walk away from their investment altogether. The question is what such a drop in net worth will have on consumer spending habits. I can’t imagine it would be a good thing.

This is also not predicated on “bubble popping”, since that is undefined. But it would appear that there is a backlog of housing inventory and a sharp recent drop in prices, which may continue as long as the supply/demand imbalance persists. Is it “popped”? I don’t know. But I don’t think the label in and of itself is all that important.

December 22, 2011 @ 4:11 pm | Comment

In a way, the Wukan protesters are fortunate that they live in a province where the provincial CCP party chief has upwardly-mobile political aspirations.

So far, everyone is a winner except the village rep who was killed, and presumably the corrupt local officials whose fates are still uncertain. The villagers appealed to people higher up on the totem pole, and their appeals were heard. The provincial level officials get to bask in the glory for defusing the situation. The central body probably gets some flattering reflections from that after-glow. Almost everyone gets to go home a winner…pending the ultimate resolution of the initial land dispute, of course.

But it will be interesting the next time, anywhere in China. Based on Richard’s NYT link, the “next time” is already here. I wonder if the spectre of the central government coming to the rescue of the little guy wronged by local officials is a renewable resource. More importantly, I wonder if/when the CCP will tire of playing good cop, and what it might look like when that change of heart inevitably occurs.

December 22, 2011 @ 4:28 pm | Comment

SK Cheung
Median is the better metric since it is less affected by outliers, in any data set exhibiting a non-standard distribution.

Yes, but the data points are split into 5 or more percentiles – top 1%, top 10%, top 50%, bottom 1% and bottom 10%. Each of these groups had positive net worth, even though the bottom 1%’s share was still absolutely miserable.

The degree of leverage doesn’t matter. Even if a person had clear title and was mortgage-free, a softening of real estate prices means a drop in their net worth

It doesn’t matter in terms of their personal finances, but it matters when you’re trying to determine whether or not there will be a significant price drop to begin with. Even if prices do drop, they will inevitably converge with prices in developed countries, given the same population density. Either that or China founds out some way to take housing prices absurdly low.

But it would appear that there is a backlog of housing inventory and a sharp recent drop in prices

There was a 40% drop in prices from 2006 until 2008 if I remember right, and still China grew at a respectable pace. Construction in tier 1 cities is only one part of all economic activity in China, but I’m glad people have moved on from claiming China will fall apart overnight if exports slow.

Based on Richard’s NYT link, the “next time” is already here. I wonder if the spectre of the central government coming to the rescue of the little guy wronged by local officials is a renewable resource.

Wukan was the “next time” if not the “next time after the next time”. This stuff happens all the time, there’s a reason why the villagers have some faith in the central government and begged them to intercede. Either that or they’re just so gullible that they believe anything the central government tells them, in which case there’s no chance of the CCP ever being forced to step down.

December 23, 2011 @ 3:03 am | Comment

” it matters when you’re trying to determine whether or not there will be a significant price drop to begin with.”
—but prices have dropped already, at least in Beijing and Shanghai as discussed in the OP. I’m not saying a drop in net worth is causing a drop in real estate values; I’m saying a drop in real estate values is causing a drop in net worth (of everyone who actually owns real estate). And this drop in net worth may have an impact on consumer spending behaviour, which is being counted upon more than in the past for sustaining and growing China’s economy when export slows.

The villagers do have some faith in the central government. That faith may be renewed or at least preserved as long as the central government gives them reason to do so. And you know what, if the local corrupt government wants to sell land but the villagers object and the central government intervenes on their behalf, geez, that’s almost a little bit democratic in a tiny way, sorta like listening to the people. So it’s not a bad baby step in the right direction. And if one baby step here begets another baby step there, time after time and so on and so forth, well, we might be getting somewhere. We’ll have to see how renewable this faith is, or will be.

December 23, 2011 @ 4:36 am | Comment

Prices took a huge hit in late 2006, too. But consumer spending is not a significant part of China’s GDP growth as of now. If you compare the chart to those of other nations (now and historically) they match the typical up and downs of any market.

Right now it’s still heavily investment based, and they’re not going to stop building now when all the empty housing units can’t even hold 30% of the people they need to house.

December 23, 2011 @ 5:32 am | Comment

They may need more housing, but what they need is most likely of the low-income subsidized public housing variety. The government could admittedly keep itself busy for a long time, and continue to stimulate the economy in so doing, by funding construction of public housing. But I think the backlog of inventory referred to in the OP is in the open market sector where developers can’t sell the ones they’ve built. In that sector, i’d be surprised if they didn’t stop building. After all, developers don’t make money by building, but by selling. And they’re having some trouble with the latter right now, hence the price drops.

December 23, 2011 @ 7:30 am | Comment

I’m going to close this thread after a few more comments so you can finish. Speak now, or forever….

December 23, 2011 @ 7:46 am | Comment

The last figure I saw was that China was building 9-10 million public housing units that can hold 3-4 people every year.

The entire “surplus” is of 65 million such units. I haven’t read enough to find the exact composition of the surplus, but I’m guessing quite a lot of it is public housing.

December 23, 2011 @ 7:47 am | Comment

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