By: Richard King
The US economy is still feeling the effects of the 2007, 2008 collapse of the US housing market. Many European economies, including Spain and the UK have also been negatively affected by the housing bubble. In the early 1990’s, Japan’s economy, at that time the second largest economy in the world, also had a housing bubble collapse from which they are still trying to recover.
Chinese real estate, according to many prominent international investors, is now the latest housing bubble candidate and if that bubble bursts it would be significantly greater than the previous ones I referred to. The question is, will increase debt creation; rampant real estate development and speculation negatively impact the Chinese economy.
Now, how did the Chinese housing market become a potential bubble? As many of my readers know, the Chinese economy has consistently grown between nine and ten percent during the past 10 years and they have become a global economic power. Chinese real estate, property development and investment has been the principal channels for the savings for increasingly affluent Chinese. Yet, despite the growth in housing supply, owning their own home is still out of reach for many Chinese and it is assumed that 64 million Chinese apartments are still vacant. Primarily because of speculation, housing prices have risen 140% since 2007. In Beijing prices have risen as much as 800%. Despite the central government’s efforts to regulate Chinese banks lending practices, local government still depend on land sales for revenue.
Many international investors, such as Jim Chanos, president of a large hedge fund, warns that China’s housing market could become the “mother of all bubbles”. Chanos says, “What we define as a bubble is any kind of debt fueled asset inflation where the cash flow generated by the asset- a rental property, office building, and condo- does not cover the debt incurred to buy the asset. What we are talking about is a world class property bubble, but the fact is that the game has to keep going. The Chinese are on this treadmill to hell because 50-60 % GDP is construction. And if they stop construction, GDP will go negative very quickly.”
The fact is that the real estate market is critical to the Chinese economy. There are very few other channels for investment. Depositing money in a Chinese bank is a losing investment because of low interest rates and high inflation so many Chinese have been directing their savings into condominiums, apartments and the like. Buying property is particularly appealing in China because, as I pointed out, the limited financial sector offers few other investment options. People buy homes as a way of saving for the future because they cannot rely on state pensions and other social security benefits. In Beijing, you can find many Chinese who own two to three properties and there is a basic demand for new homes. Let me share with you some comments I have received from some of my Chinese friends when discussing this real estate issue. “Investing in property is the best way to retain the value of your money”. “I have seen many buyers lining up for blocks outside of housing complexes in Beijing on a rainy Sunday morning. Security guards dressed as five star hotel door men keep them in order before the sales center opens.”
At this juncture, there is no definitive solution as to the impact of the burgeoning Chinese real estate development, and investment experts do not agree as to when and if the bubble will burst. In my opinion, what we will see in the next 5 years is a correction in real estate development in China which may or may not lead to a bursting of the Chinese real estate bubble.
Chairman Emeritus of Woodbury University
Director, Pacific Rim Programs at Woodbury University
Chairman/Founder King International Group
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