Property Bubble, China Trouble

The real estate bubble, or the property bubble, is posing a threat to China’s economy. If it were broken, China might have to reorganize its economic system.

Since this October, the Chinese property market has become extraordinarily hot. Stimulated by the credit expansion, investment increase and inflation anticipation, the house prices in different places of China all saw drastic increase.

As the property bubble is bigger, the real estate market in China has been under huge pressure of morality and public opinions. If no changes happen to the high house prices, the Chinese economy is exposed to a big threat of bursting property bubbles.

Crazy Property Market

On November 10, 2009, the National Bureau of Statistics (NBS) published a group of data, showing that the house prices in 70 Chinese cities saw a 3.9% year-on-year increase in October or a 0.7% increase compared with the ones in September.

In addition, in the first ten months of 2009, the total amount of investments into real estate market was 2.884 trillion yuan (USD 422.4 billion), up 18.9% from last year. Meanwhile, 663.96-million-m2 commodity houses were sold, up 48.4% year on year.

If the macroeconomic data can’t directly indicate how crazy the property market is, the drastic increase of the house prices in Beijing and Shanghai can tell people the truth.

According to the official data in October, the average price of the newly-built houses in the district inside the Fourth Ring Road in Beijing was 19.75 thousand yuan (USD 2.89 thousand) per square meter. The average house price in the district between the Fifth Ring Road and Sixth Ring Road was 10.314 thousand yuan (USD 1.51 thousand) per square meter. In addition, there were a lot of luxury houses whose per-square price is 50 thousand yuan (USD 7.32 thousand) in Beijing. Some experts said that such high house prices are only affordable for three generations of a family, which means that the grandpa, father and son of an ordinary family should spend all the money they have saved in buying a house. In Shanghai, the average per-square price of new houses in the district in the city center reached 23 thousand yuan (USD 3.37 thousand) in October, increasing by 90% in four years.

At the beginning of October, the increase of house prices in China seemed to stop for a while. Then the trading volume of the houses increased a lot. According to the data, 28 of the 30 cities in China saw a month-on-month increase in the property trading volume from October 12 to 18. All the 8 major cities, except Hangzhou, saw their property trading volume increase by 40% month on month. Chongqing was the city undergoing the largest increase, which was 252.32%. Increasing amount bigger than 100 percent also occurred to Tianjin and Chengdu.

The secondhand house market was also on an upswing. Take Beijing for example: in the first ten months of 2009 more than 200 thousand secondhand houses were sold. The whole year’s trade volume was bigger than the total volume of the last three years.

Behind the crazy property market were the records of land prices in different cities and the collective listings of the property companies. The housing premiums in 10 major cities in the first ten months of 2009 were higher than the same period of 2008. In October, 337 pieces of land deals were done in 60 cities in China, 9% of which had more than 100% premiums. The local governments benefited a lot from these deals. For example, the land deals in Beijing and Shanghai in the first nine months of 2009 generated more money than the whole year of 2008.

On November 5, Evergrande Real Estate Group went public in Hong Kong Stock Exchanges, raising the fund of 5.6 billion HK dollars. 14 days later, Longfor Real Estate Corporation also went public in Hong Kong, raising the fund of 6.7 billion HK dollars.

Behind Reasons

The analysts generally believed that the crazy property market was directly connected with the unprecedented increase of banking loans advocated by the government. The increase of house prices can also be partially attributed to the government policies, including favorable tax policies, low interest rate and decreased down payment.

In order to deal with the financial crisis, the Chinese government issued the 4-trillion-yuan economic stimulus package and implemented positive financial policies and loose monetary policies. From the beginning of 2009, different banks in China increased their amounts of lent loans. The state-owned banks represented by Industrial and Commercial Bank of China, China Construction Bank and so on all strived to lend more loans. By the end of this year, nearly all the banks had over-fulfilled their targets of credit loans.

In December 2008, the State Council implemented some policies to encourage the citizens to buy the commodity houses, including the 30% discount of the housing loans, decreased down payment and the favorable conditions in tax.

Ji Baohong, president of Shanghai Wangyuan Property Development Co., Ltd, said that the financial crisis actually saved many property companies which were on the verge of collapsing. The loose credit policies pushed the prices of land and houses upward. He shared the same opinion with Wang Shi, board chairman of Vanke Group, who said that one third of the property companies in China would go bankrupt if there were no financial crisis in October.

In Ji Baohong’s opinion, compared with the property market, the entity economy of China is on the downward way, forcing the social investment to be transferred into the property market. As the profits in the traditional industries become smaller and smaller, the enterprises which previously had no relation with property are also engaged in it to earn more money. In addition, the fear of the inflation forces more people to buy the houses because they believe that the houses are the best tools to fight against the inflation.

Another viewpoint is that the flocking of the hot money will exert influence upon the Chinese property market. According to the data of the People’s Bank of China, in the first three quarters China’s foreign exchange reserve increased by 326.6 billion US dollars. In the third quarter it increased by 148.8 billion US dollars. In September the increase was 61.8 billion US dollars while the increase in the first quarter was only 7.7 billion US dollars. The proportion of the hot money with unexplainable sources in the newly-added foreign exchange reserve kept increasing. “When the international investment market was depressed, the Chinese economy is a kind of concept. So are the Chinese property market and the appreciation of RMB. They work together to have more foreign investors increase their investments into the Chinese property market.”

Bubble Has Been Formed

The famous economist Xie Guozhong said that the property bubble in China has been formed. He drew out the conclusion with the four indices of the proportion of house prices in GDP, return rate of rent, property output and ratio of house price to income.

The so-called ratio of house price to income means the ratio of the house price to the annual income of an urban family. It is reasonable if the house price is three to six times of the family income.

According to Xie Guozhong, the house price is about 20 times of the family income in many Chinese cities. This is not sustainable. In Shanghai, the average price of houses is 23 thousand yuan (USD 3.39 thousand) per square meter. A house of 90 square meters is priced at 2.07 million yuan (USD 303.2 thousand). In 2008, the average income of a person in Shanghai is 39.5 thousand yuan (USD 5.78 thousand) a year. Therefore, the house price is 26 times of the income of a family consisting of a husband and a wife.

The return rate of rent means the ratio of rent to house price, which is considered to be reasonable if the proportion is around 1:250 according to the international standards. That is to say the house property equals 10 to 20 years’ rents and the investment return is between 5% and 10%. Now this ratio is much lower in Shanghai.

Xie Guozhong also said that the property investment now takes 10% of the GDP, which is still extraordinarily high despite the fast urbanization. This is another important index to confirm that the property bubbles has been formed in China.

Zhu Xiaohong, chief editor of Haozhai net (www. Haozhai.com) said that bubbles do exist in the property market. According to him, 70% of house buyers in Shanghai buy the houses for investment or speculation instead of living. Therefore, the vacancy rate of the commodity houses in Shanghai is quite high.

The vacancy rate is an important index in analyzing the supply and demand relationship of property. It is estimated that more than 154 million of commodity houses in Shanghai have been sold but nobody lives there. The vacancy rate is larger than 35%. According to the international standard, it is reasonable if the vacancy rate of commodity houses is between 5% and 10%; it is dangerous if the rate is between 10% and 20% and it is extremely dangerous if the rate is bigger than 20%.

The property bubble even raised the worries of some property developers who are benefiting from it. Zhang Xin, chief executive officer of SOHO China told Financial Times that the economic stimulus package driven by credit loans is blowing up a big bubble in the Chinese property market. This should be a warning signal for the real estate industry and the entire economy in China.

“In Manhattan, if the vacancy  rate reaches 10% or 15%, the investors will think that a disaster sets in. But the vacancy rate in Pudong, Shanghai has already reached 50%, the new skyscrapers are still being built.” “When you look at the growth of the GDP, you will consider Chinese economy as the new engine for the world economic growth. But if you make clear of how many investments are put in without any substantial effect, you will not be so optimistic about the aforementioned saying.”

Fan Gang, a member of the Monetary Policy Commission of the People’s Bank of China, agreed with Zhang Xin’s words. He said the property bubble is inevitable in Beijing, Shanghai and Shenzhen whose house prices are exorbitantly high.

Hard to Go down

Though a lot of complaints can be heard about that the extremely high house prices and property bubble are posing a threat to economic recovery, the insiders are still reserved in adjusting the house prices.

Zhu Xiaohong said that the house prices will not move downwards in a short term, especially in Shanghai, which is thought to be a prosperous city for the construction of financial and maritime center, the concepts of “Big Pudong” and “Big Hongqiao”, Shanghai Disneyland and the advent World Expo. “A new bubble is blown up before the old one bursts.”

He also said that the Chinese real estate market is not a pure one in which the market rules serve. Instead, the government casts great influence upon it. He thought the property bubble can only burst in five years or longer.

Jin Yanshi, chief economist of Sinolink Securities advocated that the house prices in Shanghai will double in five years. By then, some houses in this city will be sold at 300 thousand yuan (USD 43.91 thousand) per square meter.

Li Jing, managing director of GP Morgan, said on October 27 that the houses buyers in Shanghai, Beijing, Shenzhen and so on have to wait to see the changes of the house prices. “If the trade volume of houses can not move up, the supply of commodity houses in Shanghai may become larger than demand in two years.” She thought that the property developers may decrease the house prices by 5% or 10% to attract more customers.

The famous economic reviewer Ye Tan expressed her worries about the property bubble in China in Financial Times. In her opinion, the real estate has been a pain of the Chinese economy. If the high house prices can not be changed, China may face the danger of reorganizing its economic system.