News Room - Business/Economics

Posted on 12 Jan 2010

China's real estate bubble causes jitters

With property prices soaring in key cities, many investors and bankers worry that China has the next great real estate bubble waiting to be popped.

 

The Chinese government is worried, too. On Sunday, the nation's Cabinet, citing “excessively rising house prices” in some cities, said it will monitor capital flows to “stop overseas speculative funds from jeopardising China's property market”. It also said that any Chinese family buying a second home must make a down payment of at least 40 per cent.

 

For investors, many of the usual bubble warning signs are flashing.

 

Fuelled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled again. Most Chinese home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond.

 

Brokers say it is common for buyers to falsely inflate income statements for bank loans.

 

Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries.

 

With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.

 

“It's definitely a bubble,” said Beijing real estate broker Xu Xiangdong, a 24-year-old former nightclub cashier. “But it won't break because there is a lot of support beneath the bubble.”

 

Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to the cities, pent-up demand for housing, and a banking system much less exposed to residential mortgages than banks in the US or Japan could protect China, they say, from a real estate meltdown for years to come.

 

Arthur Kroeber, a Beijing-based analyst and managing director of Dragonomics, said China's economy is “not even close” to being a bubble like those seen in Japan, which endured more than a decade of sluggish growth after prices retreated, or in the US, which helped bring about the current sharp global downturn.

 

“At some point, the music will stop,” Kroeber said. But he predicted that it would not happen in China for at least 15 years, when urbanisation slows.

 

The bigger real estate problem in China now is access to housing.

 

For many people, especially the young or people moving to the cities from rural areas, the dream of owning a home is more and more difficult to attain.

 

Xinhua news agency quoted Goldman Sachs as saying that housing price increases had outpaced wage hikes by 30 per cent in Shanghai and 80 per cent in Beijing in recent years.

 

A popular television soap opera known as Snail House depicts two sisters' desperate struggle to buy an ever more unaffordable home.

 

One sister resorts to becoming the mistress of a corrupt, married official to get money for an apartment. Last month, after a broadcast official said the 33-part series was having a “vulgar and negative social impact” and using “sex to woo viewers”, viewers lashed out at him on the Internet and accused him of owning multiple luxury homes