The housing bubble is bursting in China, now what?
Analysts pointed to a massive housing bubble in China for many years, but property prices haven’t crashed… until now.
Anyone who talks about housing bubbles these days is immediately labeled a “doom and gloomer.” It’s a familiar refrain, often heaped on people like me who predicted a housing bust in the United States when few wanted to believe it was possible.
Here in America, the bubble deniers — and Never forget the bulls and bubble deniers were completely and totally wrong — the bubble deniers succumb to their optimism bias and comforted themselves with fallacies and wishful thinking, even past the point where denying the obvious was no longer operative.
The same is true in China.
First, let’s review some of the evidence of a housing bubble in China.
Locals call it ‘The City of the Dead’, a ghostly urban landscape with no residents to fill it.
More than 100 villas stand empty after they were built six years ago for locals in the Chinese city of Beihai, in the Guangxi Zhuang Autonomous Region.
They were built to cater to a new rising class of wealthy people who, it was hoped, would invest in real estate and snap up the properties, many of which are priced at over three million yuan (£285,900).
£285,900 is about $500,000.
Chinese citizens are not allowed to invest overseas, so there has been a real boom in real estate as people look for safe havens for their wealth.
In a bid to cater to those wanting to invest in property, entire cities have been built complete with skyscrapers, shopping malls, highways and parks. But they are often devoid of residents and turn into soulless ‘dead zones’ due to their distance from important economic centres.
Some workers, who can earn as little as $2 (£1.18) a day, have invested savings from up to to three generations of one family just to buy the properties, but can’t make use of them as they are too far from key city centres, meaning they are left with no residents at all.
Work needed: Further investment will soon be needed on the properties to maintain them as they have been standing empty for six years
Most hope the growth in property values will make the investment worth the risk, despite being unable to afford to live the houses they have invested in, however, observers believe China is over-building, which could cause a housing bubble of vacant properties.
thers say that the modernization of China is ‘the greatest urbanisation story the world has ever seen’, and that ghost towns like this one will soon become ‘thriving metropolitan areas’.
That remains to be seen. Six years on and with not a soul living in them, the villas will soon need more money spent on them to protect them from the elements.
The construction industry not only employs hundreds of thousands of Chinese, but it has displaced hundreds of thousands of others who have been forced off their land and homes to make way for construction projects.
‘It’s a madness – homes built to stand empty!’ said one local who lives in a wooden shack.
In America during the housing bubble, our homebuilders responded to false demand signals and built large numbers of McMansions in places like Beaumont or Palmdale. It was a mis-allocation of resources that put the wrong houses in the wrong place at the wrong time.
We built $500,000 houses for a local population making about $40,000 a year. In China, they built $500,000 houses in areas where the local population lives in shanties on $3,180 a year, so take our bubble and multiply the problem by 12, and you start to understand what’s been going on in China over the last two decades.
Analysts have warned for years that China is in the midst of a gargantuan property bubble and the inevitable reckoning may have finally arrived as massive oversupply and a tightening of credit appears to be crushing the market—with consequences for the global economy
You know a property market is in trouble when developers stage long-jump contests to attract buyers. That’s what happened earlier this month in the eastern city of Nanjing. Looking to sell apartments in a new residential complex, a local newspaper reported that agents from the developer, Rongsheng Group, lined up potential customers behind a queue and asked them to leap forward. Those who jumped the farthest got the biggest rebates — up to $1,600.
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Chinese newspapers these days are riddled with such tales of desperation. On May 9 in the central Chinese city of Changsha, pretty girls were enlisted to hand out 50,000 tea eggs to lure people into a housing fair. Developers in Shenzhen and Fuzhou are offering to sell apartments with no down payment. In Hangzhou in April, two real estate agents competing for buyers got into such a vicious fistfight that the police had to intervene.
The problem in China is valuation: when the benchmark for valuation is only comparable sales, which it is in China and in our own residential real estate market, then each sale represents a higher comparable value justifying an even larger loan. There is no tether to real, underlying value as determined by cashflow. That makes for a dangerously unstable market because loan payments are not backed by rent. If a few borrowers become insolvent, the entire system crashes.
Are we witnessing the end of China’s great property boom? For years now, some analysts have warned China was in the midst of a gargantuan property bubble, ready to burst at any moment, with dire consequences. But Chinese real estate defied the naysayers and continued to soar. Both developers and customers, bypassing restrictions imposed by policymakers to constrain the industry, continued to build, invest and propel prices higher.
Now, though, the inevitable reckoning may have finally arrived. Massive oversupply combined with a tightening of credit orchestrated by the government appears to be crushing the market.
Falling apartment prices spell bad news for China’s economy. Real estate is one of the main drivers of China’s growth, with property investment accounting for 16% of GDP by Nomura’s calculations. A downturn could dash hopes for a recovery of the world’s second largest economy, already suffering through its worst slowdown in more than a decade, and the impact would be felt across the world.
So what is going to happen? Will China’s housing bust turn foreign buyers into desperate sellers? Our own real estate market has enjoyed some influx of Chinese investment; I know because I live in a rental owned by a Chinese investor. I recently asked, Are the Chinese buying California homes in large numbers? The answer is: not really. In August of 2013, the OC Register published Foreign investors buying homes in O.C, and they reported that foreign buyers represent between 5% and 7% of the housing market.
But what happens if that 5% to 7% become sellers instead of buyers? What if the pretenders who borrowed their way to prosperity (yes, some Chinese did this too), what if they need the money to make debt-service payments?