Are House Prices Rising Too Fast in China?

This is a good question and it is fortunate that a group of respected economists have looked carefully at the question.  My own instinct is to say "yes" they are and that a housing price collapse could have serious implications both economically and more importantly politically.

The authors suggest we do not have to worry just yet.

Are House Prices Rising Too Fast in China?

Ashvin Ahuja
International Monetary Fund (IMF)

Lillian Cheung
Hong Kong Monetary Authority

Gaofeng Han
Hong Kong Monetary Authority; University of California, Santa Cruz - Department of Economics

Nathan Porter
International Monetary Fund (IMF)

Wenlang Zhang
affiliation not provided to SSRN


December 2010

IMF Working Paper No. 10/274

Abstract:     
Sharp increase in house prices combined with the extraordinary Chinese lending growth during 2009 has led to concerns of an emerging real estate bubble. We find that, for China as a whole, the current levels of house prices do not seem significantly higher than would be justified by underlying fundamentals. However, there are signs of overvaluation in some cities’ mass-market and luxury segments. Unlike advanced economies before 2007-8, prices have tended to correct frequently in China. Given persistently low real interest rates, lack of alternative investment and mortgage-to-GDP trend, rapid property price growth in China has, and will continue to have, a structural driver. 

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China's housing market - is the bubble about to go BANG

Good analysis from SERI Quarterly. My belief is that there has been a dangerouslt large bubble for a while. The real danger is who loses from the bubble bursting - state owned enterprises, the army, government officials?

There could be blood on the carpet - literally.

The article with footnotes and more figures can be seen by clicking the link below.

Possibilities of a bubble Collapse in the Chinese Property Market [SERI Quarterly]

Japan and the US present good examples of a property market meltdown and they both exhibited common symptoms before the plunge. First, household debt was extremely high. US household debt amounted to 133 percent of disposable income in 2007 right before the crisis, while debt in Japan was 130 percent in 1990. Second, the increase in real estate prices had been running ahead of growth in disposable income from 1999 to 2006 in the US and from 1986 to 1991 in Japan. Both countries maintained low interest rates before their property bubble burst, spurring a sharp run up in home prices with deeply leveraged purchases; loan growth remained far higher than income growth for at least five years.

China's price to income ratio (PIR) is among the highest in the world, and according to some analysts, the market is frothy because housing prices are very high in terms of income levels. In fact, China's PIR is eight times on average, 19 times in Beijing and 16 times in Shanghai. This is very high compared to other countries: three to six times income in the US, 7.5 times income in Korea and 5.7 times income in Japan.

Despite such high prices, 70 percent of residents in large cities and 80 percent of those in ordinary cities have their own house. This is because many homeowners own homes provided by the government until the housing policy reform of 1998. Most significantly, China's household debt is only 39 percent of disposable income; accordingly Chinese property owners can withstand a decrease in property prices, as they are not suffering from high interest rates.7 In addition, the rate of increase in real estate prices surpassed disposable income growth only in the second half of 2009, meaning that if there is a bubble in the market, it is less than a year old.

Therefore, real estate prices are high in nominal terms, but are not in practice, an actual burden for most people. Considering the household debt ratio, the time the bubble was formed, and the rate of home ownership, if property prices slide, it is more likely to be a temporary adjustment and correction, rather than a warning sign of a coming meltdown.

Low Financial Industry Exposure to the property Market

New loans for property increased 327 percent in a year from 480 billion yuan in 2008 to 2 trillion yuan in 2009, and recorded 47 percent growth in the first half of 2010 compared to the same period of 2009. However, in 2010, the share of loans for property has remained a low 20 percent of the total, compared to 33 percent in Korea (March 2010) and 39.2 percent in the UK in 2006 (immediately before the collapse of its own housing bubble). As of the second quarter of 2010, loans for property (real estate development and mortgages) amounted to 20 percent of the total even after property prices soared from the second half of 2009.

Also, Chinese banks appear financially sound. Loans increased remarkably in 2009 as a result of government stimulus, but the loan-to-deposit ratio stood at 70 percent in April 2010, thanks to the government's 75 percent cap. Compared to bank assets, loans accounted for only a small amount,8 while property-related loans took only 10 percent of assets, enough for banks to cushion themselves from a plunge in real estate prices.9 Therefore, it is highly unlikely that a property market crash in China would trigger a series of bankruptcies among financial institutions, precipitating a financial crisis, as it did in the US and Europe in 2007 and 2008.

Long-Term Challenges of the Chinese Property Market

Chinese property issues are directly linked to government revenue. Real estate sales increasingly account for a greater share of local government revenue. Sales accounted for 23 percent in 2009.10 This has prompted many analysts to predict that the government would not control property prices, as price increases mean higher public revenue. To maintain stable financial income, reasonable growth of real estate prices would be ideal.

Meanwhile, most current homeowners benefited from the government housing policy. Today's new arrivals to cities, self-employed people, and new graduates, however, will find it hard to buy their home. Some non-owners even refer to themselves as "house slaves," working only to save enough to buy a home.

Property issues represent not only economic, but also social, class, generation, and urban-rural disparities. Although a bursting property bubble is improbable, continued price growth may spark severe economic and social problems. To prevent this, the government should maintain balance between housing price control and government revenue.

Currently, China is facing economic and social changes resulting from a transition in its growth commodel. As the property sector takes a large share in the economy, China needs to come up with solutions to prevent property prices from undermining economic and social stability, particularly in this transitional period.

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The Chinese Housing Bubble - 40% falls possible

I have long been a raging bear on the Chinese housing market. This is a result of a number of China specific factors. (1) lack of assets to invest in (2) the actions of state owned companies including the army that are dangerously addicted to speculation and not doing what they are supposed to do.

This recent CEPR paper looks at this issue in detail. I tend to agree with their headline figures and the results match my own concerns.

40% falls are a real possibility. The fact that the authors pick up on the state owned company problem show that these authors are on the ball.

"Evaluating Conditions in Major Chinese Housing Markets"

NBER Working Paper No. w16189

JING WU, Institute of Real Estate Studies, NUS, Institute of Real Estate Studies, Tsinghua University

JOSEPH GYOURKO, University of Pennsylvania - Real Estate Department, National Bureau of Economic Research (NBER)

YONGHENG DENG, National University of Singapore

High and rising prices in Chinese housing markets have attracted global attention, as well as the interest of the Chinese government and its regulators. Housing markets look very risky based on the stylized facts we document. Price-to-rent ratios in Beijing and seven other large markets across the country have increased from 30% to 70% since the beginning of 2007. Current price-to-rent ratios imply very low user costs of no more than 2%-3% of house value. Very high expected capital gains appear necessary to justify such low user costs of owning. Our calculations suggest that even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing, absent offsetting rent increases or other countervailing factors. Price-to-income ratios also are at their highest levels ever in Beijing and select other markets. Much of the increase in prices is occurring in land values. Using data from the local land auction market in Beijing, we are able to produce a constant quality land price index for that city. Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.

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China's empty city of Ordos

Where does China's 8% growth really come from?

Having just read the Genghis Khan trilogy I am a big fan of inner Mongolia and the fall of the Chin empire. The unwashed Mongol hordes operated an impressive and ruthless military machines. Although not intellectual these books are an easy read. Took me a week to read all three (see below).

Back to the empty city - Genghis was never a "city man" showing a strong preference for the open plains. Perhaps this explains the empty city of Ordos.

There are some simple supply and demand issues with the "empty city". This is another example of the waste from China's stimulus package. When the money runs out there will be carnage.




Here are the books on the cheap for those who like a boys own story with a body count in the millions.










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The new housing bubble in China

I will post a lot more on this topic but I believe that a large percentage of China's stimulus package ended up in the housing market (and the overinflated stockmarket).

Both will fall again in my view but in the meantime the predictable articles are gaining online and offline column inches.

Home rates going through the roof: city dwellers [People's Daily Online]

Shou Zhenwei, a 28-year-old working at a state-owned company in Beijing, said he felt the home prices had gone through the roof and to buy a home in Beijing was like an unrealistic dream for him.

Shou had to increase his budget from 1 million yuan (146,420 U.S. dollars) last year to nearly 1.5 million yuan this year to buy a second-hand two-bedroom apartment in downtown Beijing together with his fiancée.

A recent survey released by the People's Bank of China (PBOC), the central bank, showed that 65.2 percent of Chinese urban residents in 50 cities nationwide thought that home prices were "high and unacceptable" in the third quarter, up 2.8 percentage points from the second quarter.

About 41.5 percent of respondents predicted that home price in Chinese cities would continue to rise, said the PBOC.

Home price in Beijing would continue to rise moderately in next five years, Liu Xiaoguang, president and chief executive officer of Beijing-based Capital Group, a leading property and finance conglomerate, told Xinhua.

Shou is only one of the millions of Chinese rushing to buy an apartment this year, as they thought home prices had hit the bottom at the start of the year.

Chinese home sales volume and prices began to pick up since February, boosted by people's pent-up demands and their heartened confidence of the economy recovery.

Wang Ke, a sales manager at a Beijing-based IT firm, called himself "a housing slave", as he spent more than half of his salary on the housing mortgage every month, reported Saturday's China Daily.

Wang coughed up 1.2 million yuan for a 70-square-meter flat in Beijing within the fourth ring road by borrowing the down payment from his parents and paying the rest of the 20-year loan in equal monthly installments of 4,500 yuan.

Areas within the fifth ring road is considered the central city in Beijing.

Analysts held that home prices should not increase too quickly, otherwise it would add too much pressure to urban dwellers and hurt the long-term healthy development of the property industry.

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Is china pumping up another asset bubble?

In fact you could argue that the property bubble in China never really went away but it is inflating again and this spells danger.

Andy Xie at China Digital Times rants. This is a rant and is a rather simple analysis of a complex picture but there is an element of truth in his words. It may take a lot longer that the 4th quarter of 2009 to deflate however.

Andy Xie: “Crazy Again” [China Digital Times] H/T TDWatkins

Chinese stock and property markets have bubbled up again. It was fueled by bank lending and inflation fear. I think that Chinese stocks and properties are 50-100% overvalued. The odds are that both will adjust in the fourth quarter. However, both might flare up again sometime next year. Fluctuating within a long bubble could be the dominant trend for the foreseeable future. The bursting will happen when the US dollar becomes strong again. The catalyst could be serious inflation that forces the Fed to raise interest rate.

Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.

[...] In summary, the market frenzy now won’t last long. The correction may happen in the fourth quarter. There could be another wave of frenzy next year as China can still release more liquidity. When the dollar recovers, possibly in 2012, China’s property and stock market could experience collapses like during the Asian Financial Crisis.

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Housing Crisis in China: An overview

One reason why I believe the economy is in a much worse state than many seem to want to admit is the state of the housing and retail market. One problem is that the Chinese are yet to experience falling prices and they will not be prepared for the fallout.

Danwei have a useful summary piece with some interesting links. The interview with the original Forbes writer is interesting.

1. Forbes: Olympian Bust?

Beyond the hoopla, an increasingly bleak property market is spreading around China

The sales hall at the oasis housing development welcomes customers with multicolored streamers, water fountains and marble floors. Sales agents inform visitors that only a few units are available from the first two phases of the project and that 70 of the 130 or more buildings are almost completed. But just a few hundred feet behind the sales hall, some of the "almost completed" buildings look like neglected hulking shells, the concrete aging and exposed, the green scaffolding fabric tattered from neglect. Construction workers idled nearby. Prices have been slashed from $95 per square foot to $55. Industry insiders say that as few as 300 units have been sold out of the first 2,000 put up.

The Economist: What goes up

Numerous other property companies around China are similarly beleaguered. The Chinese press says that in September around 100 homeowners in the eastern city of Hangzhou stormed into the offices of Vanke, a big developer, to demand compensation for falling prices. In March a company in the southern city of Shenzhen (pictured above) caused a stir after it cut prices by 20%, by coughing up the difference to about 25 previous buyers of its property. Others have resisted giving cash, but have tried to calm homeowners by offering discounts on management services.

International Herald Tribune: Chinese banks brace for housing aftershock

As in the United States, Britain and Spain, the real estate bubble in China has turned into a bust in many cities; only one of the two dozen towering cranes at projects near Liu's home was in operation one recent afternoon.

Banking experts and economists expect the bust to produce, by next spring or summer, a sharp increase in loan defaults that could erode the high profits earned by Chinese banks over the past three years.

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"Real estate developers are threatening the People's Bank of China, saying, 'If we die, the banks die first,"' said Yu Yongding, a former member of the central bank's monetary policy committee and now an adviser to the cabinet.

According to Yu, developers are exaggerating the dangers that bankruptcies could pose for banks. "If the government bows to this kind of pressure, we lose all the benefits of what we did before" to control inflation, Yu said.

Paradoxically, the relative lack of sophistication of the Chinese mortgage system could keep its real estate bubble from expanding into a credit and financial crisis like the one that has engulfed the West.

Wall Street Journal: China Aids Home Buyers to Curb Impact of Slump

BEIJING -- China's government is racing to make sure one of the world's biggest housing booms doesn't turn into a bust.

How the swoon in housing plays out in coming months may largely determine how severe the nation's economic slowdown during the global financial crisis will be -- and how acute the world-wide repercussions of the slump will be, as China's demand for construction materials declines.

Construction workers demolish old buildings to make way for a new property development in the center of Shanghai.

While housing bubbles around the world have burst, China's market has been seen as different because its surge in home building has been driven less by financial leverage than by real demand from a rapidly urbanizing population. Anywhere from 15 million to 20 million people move to Chinese cities each year.

But sales of new housing in China have plummeted in recent months as buyers have been spooked by a deteriorating economy and weakening prices.

Here is the interview:

China real estate market slump: Q&A with Gady Epstein [Danwei]

Has the Beijing property slump described in your article continued?
Yes. Prices are supposedly holding steady (or even going up), but the key figure to watch for is transactions. No one's buying apartments, no one's signing big leases on office space. The secondary market for apartments looks ugly as well.

Is it going to get worse?
I think it will definitely get worse in the short term. The central government has just announced measures intended to prop up the housing market, including a lower down-payment requirement, but it's obvious that the public has lost confidence in the market and is taking a wait-and-see approach. People no longer assume, as they did for much of the last five years, that buying an apartment is a can't-lose investment.

How will the global financial crisis affect the Beijing property market?
In the short run, it will have both a psychological and real impact, as people and companies delay big purchasing decisions either because they're nervous or because they're short on cash or credit.

In the long run, the world could look to China to lead the recovery, and it's possible that a year from now, people will be talking up real estate in Beijing again. I suspect we're looking at more like 18 months to two years, in part because the financial crisis will continue to play out for some time. But it's impossible to see that far ahead. Many have looked foolish in the past for betting against China, just as quite a few people looked foolish for betting only 12 months ago that the Chinese stock market would keep going up.

Is there any danger in China of slowing economic growth leading to foreclosures on a large scale?
There is a danger of this in the next year, as homeowners begin to see their home values fall below their mortgage balances. But personal savings are high in China and the mortgage market is not as wildly creative as in the U.S, so the danger, while real, is not a systemic threat along the lines of the U.S. sub-prime disaster.

Most economic analysts who watch China agree on one thing: the long run picture — five, 10 years from now — looks good for Chinese real estate. That's because of ongoing urbanization and because there are still few places for Chinese to park their money, besides banks, the stock market (!) and the art market (!!).

I tend to agree with the interviewee's answers although I would tend to be a little more pessimistic. Once burned it will take a while before trust in the housing market returns.

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