Shanghai property prices cool, but at what cost?

How would you have liked to make a cool US$250,000 in the last couple of years? Easy, all you had to do was to buy a US$250,000 apartment in a posh district of Shanghai in 2003. Earlier this year, you could have sold that same apartment for over half a million. Some people did, good luck to them. However, does anyone think that these kind of ridiculous gains are sustainable in a national economy? Of course not, and that’s what’s meant by the words “froth” and “bubble” when applied to Shanghai’s property market.

From 2002 until about 6 months ago, Shanghai’s property market prices increased by 30% per year – making it the hottest real estate market on the planet. Foreigners, both private and institutional, grabbed a piece of the action. Wealthy Chinese, with few investment options open to them, also saw the Shanghai market as a fine investment opportunity. Those looking for a place to put their ‘hot money’ frequently chose property, hoping for a double jackpot payout on both higher property prices and the revaluation of the Yuan. Speculators bought and sold properties by the dozen within days, usually reaping huge and easy profits. Now, however, according to local estate agents, the situation has changed.

In June, the Chinese government slapped a series of taxes and other levies on real estate transactions to try and rein in speculation and cool prices. It worked, prices have already dropped by as much as 30% and the volume of sales by 70%. Some 4,000 small Shanghai real estate agencies have closed in the last 3 months alone. Developers who used to hang up the phone if an estate agent dared to question the price of an empty concrete shell of a property are now slashing prices and obsequiously offering free fitted kitchens, parking spots, country club membership and even new cars to try and tempt buyers and prevent them from waiting for the prices to spiral even further. Many wealthy speculators have been caught with their pants down, left holding the keys to properties that no-one wants to buy and facing huge losses.

How real is the threat of negative equity? Very serious, Morgan Stanley estimates that a drop in property prices of over 30% would start to signal negative equity. Mortgages make up between 40-50% of all bank lending in Shanghai. Shanghai property, in turn, accounts for 20% of all mortgages nationwide. Certain banks, like China Merchant’s Bank, specialize in mortgages and negative equity could trigger a huge amount of defaults on existing loans.

Any Shanghai real estate crash would not only impact the banks and other property markets across China but also affect the wider economy. For instance, by reducing demand for construction materials, increasing unemployment and shaking investor and consumer confidence. Negative equity is, not surprisingly, one of the government’s biggest fears.

UPDATE: On the subject of property prices, Shenzhen Ren has an very amusing anecdote which includes both greedy estate agents and a lot of smashed windows following a mini-riot by unhappy buyers during the traditional Golden Week property-hunting tours.

The Discussion: 12 Comments

I guess the fever is still spreading. In one of the oddest twists on civil unrest I’ve seen here, we had an investors’ riot over being restricted from throwing money at new homes. At my home!

October 6, 2005 @ 11:33 am | Comment

Yes mate, that’s quite a story. I’m devastated that you actually missed it. After all those years quietly living on the outskirts of Shenzhen, when ordering a ‘tong’ of water on the phone in Chinese was the highlight of your day (you even posted about it) a genuine riot takes place right outside your front door…and you miss it.

“Bummer” doesn’t even come close.

October 6, 2005 @ 12:02 pm | Comment


Excellent post, as always. A few questions:

Would the Chinese government ever reverse (or partially reverse) the taxes and other restrictions they enacted to slow (but presumably not to kill) the real estate market? Seems like a logical step, at least for the Shanghai market.

Are the real estate price data you find reliable? Is there similar price series data available for Beijing and other citires in China?

October 6, 2005 @ 4:27 pm | Comment

I know. I’m really steamed that I missed the riot. And it REALLY makes me wonder how hot this property fever is. The property company here has a great reputation, and to kick up the prices without warning is out of character for them (wonder if I can buy stock in the company ;-))

October 6, 2005 @ 8:21 pm | Comment

Real estate price data is pretty easy to come for the big cities like SH, Beijing, etc. just go to the websites of the large R/E firms such as CBRE, JLL, DTZ, etc. usually they have a pretty good selection of reasonably relaible data

October 6, 2005 @ 10:35 pm | Comment

Daily linklets 7th October

The curious case of Goggle’s map service. See the world in Macau. The gossip and rumours* before the upcoming 5th Plenum of the CCP. The Cruise/Holmes foetus speaks*. Father Clement* – Hong Kong’s oldest monk and man. Iceheat is a new forum site tryin…

October 7, 2005 @ 12:37 am | Comment


The govt slammed taxes and levies on property in order to curp speculators from pushing up prices even further. The larger a bubble becomes, the harder it will *pop* and that’s what they were afraid of.

Sure, I see no reason why the govt would not repeal the property taxes if it served their interests at some point in the future.

As you say, the policy has had a positive effect so far. However, I hope the prices don’t slide too much.

One thing China has a big problem with is non-repayment of loans. On the one hand, credit culture is fairly new to China and on the other, the banks (and their credit rating skills) are a joke. Not a nice mix. Negative equity could trigger mass non-repayment of mortgages and that would spell disaster.

In addition, what happens in Shanghai could well spread to the whole of China.

October 7, 2005 @ 6:34 am | Comment

See GWBH for credit data. He’s my mate and he knows these things.

October 7, 2005 @ 6:35 am | Comment

Good post. I like the way you make complicated subjects simple, straightforward and easily understandable for laymen like myself! Talk about property bubbles and speculaters and I usually do not have a clue what is going on, but I understood that post!

The problem with making the big bucks is much easier if you have big bucks to start with!

October 7, 2005 @ 8:07 am | Comment

My street out in Pudong was filled with nothing but real estate agencies a year ago when I moved out there. There were seriously 20 something agencies there. However, over the last few months, 8 of these agencies have closed down… to be replaced by (yeah, you guessed it) meirong meifa (“hello, massagey!”) and cheap restaurants.

October 9, 2005 @ 12:26 am | Comment

It must take you longer to get home of an evening then Kevin!

I think that comment about nearly half a street of estate agencies closing down says more about the Shanghai property market than any statistic could.

October 9, 2005 @ 1:24 am | Comment

I live way out in the booneys, where pretty much all we have is real estate (and now a few massage places and cheap restaurants), so it seems like my area has taken it pretty bad. When I was out at Zhongshan Park, which also has a long row of real estate agencies along Changning Road, it didn’t seem to have been hit as hard.
I forgot to mention, we also got a pet store. To touch on a previous thread, I haven’t seen any police beating the dogs to death yet, although I can confirm that a friend of mine who owns an adorable unregistered dog does worry about that. He only takes his dog out late at night, and only in his apartment complex, for fear that it could be taken away and killed.

October 9, 2005 @ 2:47 am | Comment

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