I recently met with several economists who were discussing the ongoing euro zone debt crisis. When they mentioned debt, they naturally linked the discussion to what many are describing as China’s property bubble.
Europe is the largest single market for Chinese exports, and the crisis in Greece and Italy will naturally put pressure on China’s economy. Indeed, figures released today already show China’s exports rising at their slowest pace in two years. To protect growth and prevent a hard landing, China may consider easing monetary policy, a move that would risk exacerbating the property bubble that the government has busily been trying to deflate.
Such concerns aren’t unfounded. I remember during the global financial crisis of 2008 receiving half a dozen marketing text messages a day. I sometimes even received cold calls from sales agents. At the time, China’s property market was still depressed, with properties within a six to seven kilometer radius of the Forbidden City being priced at as little as 10,000 yuan ($1,580) per square meter.
As economic conditions became increasingly gloomy, Premier Wen Jiabao proposed a four trillion yuan stimulus plan, which in turn caused property prices to surge. Over the next two years, the prices of some properties increased several fold.
With prices rising quickly, the government imposed various restrictive measures to cool China’s property market. Bank capital reserve requirements have been raised multiple times to discourage lending, while strict rules have been put in place on private purchases of third properties, to discourage speculators. Banks, meanwhile, have raised interest rates on loans, making it harder for members of the public to access cash for purchases.
And now, my phone is once again ringing with sellers highlighting the falls in property prices. Is the Chinese real estate bubble bursting? Could falling property prices and a possible slowing of European demand prompt the Chinese government to ease monetary policy once more? And would this spark another property boom just as prices look to be falling in some areas?
The government would be advised to wait and see what happens next.
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Leonard R.
Maybe I am naive, but I’ve never really understood the reporting on the Chinese property bubble. This is a good article. I’m not faulting the writer. But I still don’t get it.
Yes. There are a lot of vacant apartments. But there is also a population of 1.3 billion people. How many hundreds of millions of those people need apartments?
So even if prices are falling, it seems there already exists a pool of potential buyers. What separates the property from the buyers basically is the price of entry.
The housing bubble in China is very different from what happened in America. In the US, the home-owners were over-leveraged. And the banks that lent to home-owners themselves were over-leveraged. But IIRC, the bulk of the loans went to owners & not to developers. Also in the US, the price of entry into home-ownership was much lower. Down payments were smaller than what is required in the PRC. And many owners got into homes without any down payment at all.
That’s not the case in China. It is the developers who are in trouble & the banks that lent to developers. The owners themselves only stand to lose their investment or a share of it. And unlike Americans, Chinese owners made a substantial down payment to get in.
So I just don’t get it. This is a good article. But it seems to me that food and fuel inflation are a lot more dangerous to the PRC than the housing bubble.
Maybe I’m wrong about that.
Nylon V
My experience in Dalian in the first half of 2011 was living in a luxury high rise which was partially vacant. The building looked in the vicinity of five years old, but could have been less than that given the way things age in Chinese cities. In spite of this new and perfectly suitable luxury high rise having plenty of apartments for sale or rent there were two new sky scrapers being built on either side. Though the pace was dialed back at night, construction continued 24 hours a day. It seemed to me from what I had been reading and what I was seeing firsthand that affordable housing was being torn down to make room for unaffordable housing for which apparently supply already was exceeding demand. That they are bringing people into the upper and middle classes at a rate high enough to warrant these 24/7 construction projects looked implausible.
Kevin Slaten
Leonard:
The link you’re missing here is the composition of the Chinese home-buyer population. These aren’t hundreds of millions of middle-class buyers. The majority of the population looking for new homes in the cities are quite poor; they are migrant workers. Especially young (born after 1980) workers. And this is the fastest growing segment of the Chinese population. They already number past 100 million and will continue until well into the 2020s. Their average annual wage could could not buy *one* square meter in downtown Beijing.
So all of this expensive housing is serving no one. The people who might be able to afford it already half residences in the city. The ones who need homes cannot afford to liver in these glitzy towers. They need cheap housing.
The the problem isn’t the Chinese buyer’s demand. It’s the supply. It doesn’t suite the needs of the consumers. So these expensive apartments actually serve a *very* small population, which makes it an expensive product.
Moreover, it results in workers (that cities need for economic sustainability) giving up on settling in the expensive city and going to second-tier or third-tier cities to find work.
Alan
Yeah, you are naive. You think the housing bubble won’t affect the people just because its only the property developers who have debt. The only difference between the Chinese and the US housing bubble is the route it takes before it hurts the normal people.
So what will happen when the bubble collapses. Obviously property developers will go bankrupt. Land prices and sales will go down, and because local governments depend on land sales to run they too will also go down. The construction industry in general will collapse because developers don’t have money to build. For example cement makers, pipe makers, glass makers for windows, etc will all suffer. This will also mean that companies that sell iron, copper, and the raw resources for cement will suffer.
Financially it is the people who will suffer despite the fact that local governments and developers no longer have anyway to pay the banks back for the loans they have gotten, the central government will bail them all out with the people’s money through negative interest rates, which are like hidden taxes.
That means lower consumption, which is bad because China is trying to get away from an export economy by making chinese consume more of the products that it produces. Which also translates into less consumption of foreign goods.
All of the above also affects countries such as Canada and Australia(exporters of commodities), Korea, Japan, and Germany(exporters of consumer goods). As a result people in those countries don’t spend money and consume less.This affects Chinese exports and will hurt the Chinese people even more.
Beyond that there is psychological damage. After the housing bubble no one will ever look at China the same way. People believed and trusted in China because it looked so infallible. However if the bubble pops and China is severely damaged that illusion will be gone and people will turn away from China the same way people have turned away from the US three years ago and Japan 23 years before that.
So yeah, you are naive.
John Chan
@Alan,
“People (foreigners and speculators) will turn away from China the same way people have turned away from the US and Japan.” is a good thing for China, in my point of view. Once the spot light turn away from China, there will be no more obsessive jealousy and resentment against China any more, China can settle down and develop at its own pace and at its own way.
Kalabairava
Leonard,
Let me get you back to basic economics. A “Market” is not just people who want goods. A “Market” refers to people who want to buy a certain goods backed by an ability to pay for it.
Now the point is not how you lose (whether by overleverage or oversupply). The point is there is no market(in US because they have become poor and in CHINA because they are already poor) and you have to book a loss to sell it.
When you book a loss you default to the bank and the banks in turn default to their depositors. This in effect further reduces the “Market” and you are in a vicious trap. Until the losses are set right.
Frankie Fook-lun Leung
most people talk about China as if Beijing, Shanghai, Guangzhou and Shenzehn constitute China. Coastal China is very different from inland China. Look at Chongqing and Chengdu and other second or third-tier cities. One should never generalize about China. The real estate markets (note the plural) are stratified and differ enormously. Some markets are extremely speculative and others are not. Some have a reasonable secondary market and others don’t. Bearing in mind that China is primarily an agricultural country, before 1979 there were hardly any major building developments to satisfy the country, there is still growth potential. Unfortunately, many of the new developments are asking for prices the average citizen can’t afford. China is still not a market economy. The government and state still occupy a substantial part of the economy. Don’t ever look at the Chinese market like Manhattan or Hong Kong.
Justin H
So would it be safe to assume that where one is in China like in the U.S, the real estate market is vastly different? And to add to that, I suspect then that some parts might be more affect than others like with the subprime mess here in the States. Which had the effect of lowering house prices accross the board, but some areas worse than other.
JUSTSAYNO
“Don’t ever look at the Chinese market like Manhattan or Hong Kong.”
I wouldn’t equate the US housing market with Hong Kong’s. Hong Kong’s market is a lot closer to China’s than Manhattans. Unlike the US, property is still the premium investment choice for the wealthy in Hong Kong. People buy homes to invest and not to live in. HK’s income disparity on the other hand is the same, if not worse than China.
If you look at the entities who are developing the ultra-lux apartments in large Chinese cities like Shanghai and Beijing, you will find that most of them are Hong Kong/Taiwan firms. IMO they are the largest real estate speculators in large Chinese cities.
Milo Jones
The two key aspects of this question are:
1) Will the bursting of this bubble creates a self-reinforcing negative effect beyond China’s shores? and,
2) Will the bursting of this bubble threaten internal stability in China?
And the problem, of courses, is that these two questions are linked… No one knows how that story ends, but it’s not pretty. See “China’s Present, the World’s Future, and the Pretense of Knowledge”: http://silberzahnjones.com/2011/05/15/china%E2%80%99s-present-the-world%E2%80%99s-future-and-the-pretense-of-knowledge/
Yang zi
Bubble or not, high property price is not good for society development. You want social mobility, not rent takers draining the money from young people. I am looking at a stop and go type of measures to control property price. Property price can stay the same or somewhat lower until inflation and income catches up. China has plenty of land to house all it’s people.
scott
>population of 1.3 billion people
So what? American has 300 million people, and immigration, and it overbuilt. Why can’t China be as stupid?
a_canadian_observer
@scott: Look, the other guy is bad too. It’s OK for me to be bad as well. Pathetic!
Leonard R.
@ scott November 12, 2011 at 2:39 am
>population of 1.3 billion people
>So what? American has 300 million people, and immigration, and it overbuilt. >Why can’t China be as stupid?
Ha ha!
Good point.
Staatsbankrott
chinas government will have to burst the property bubble to take the money out of the market that they pumped in to create a booming economy.