China's Housing Bubble

China has created a new housing bubble. Here are some excellent reports on what the bubble looks like and some ominous glimpses on how it may end. Like all bubbles it will burst and the economic fallout will impact China’s economy and the U.S.’s. The frenzy indicates that the blow-up will occur soon.

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China was very quick to reinflate their housing market and they are currently in a new bubble, where prices are up 68% YoY in Shanghai. This story reported on NPR by Luisa Lim in Shanghai is fascinating.

Listen to this audio podcast:

China’s Housing Bubble from NPR

People’s behavior during a bubble is universal: greed on the way up and fear (panic) on the way down. In economic terms when people are stung by economic reversals they usually learn from experience and recognize the bubble for what it is. But, as we found here in America, each generation must learn this lesson on their own.

You will note how local governments are fueling this boom by becoming property developers themselves in their search for new revenues. China’s central bank flooded the economy with cash during the crash and easy credit makes it easy for local governments to finance and develop property they own.

Here is a typical story of bubble fever (from Bloomberg):

Li Nan has real estate fever. A 27- year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700- square-foot apartment in west Beijing.

Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment. If he finds the right place — preferably a two-bedroom in the historic Dongcheng quarter, near the city center — he hopes to buy immediately. Act now, he figures, or live with Mom and Dad forever. In the last 12 months such apartments have doubled or tripled in price, to about $400 per square foot.

“This year they’ll be even higher,” says Li … .

Note the comments by the analyst in the NPR story at about 3:30. He says that there is plenty of demand for housing and China’s growth has at least another 20 years to run. These were the same arguments that almost all U.S. economists used to justify our housing boom. We were told that America’s population growth would always be ahead of supply and that historically housing prices never actually went negative in the last 60 years. They fail to understand the dynamics of a bubble and the malinvestment created by the central bank’s cheap money policy. Eventually all bubbles collapse.

From Roubini:

[China's] urban property prices increased 7.8% y/y and 1.5% m/m in December 2009, up from 5.7% y/y and 1.2% m/m in November. This marked the highest y/y growth rate since June 2008, and the third-fastest m/m growth on record. Prices rose y/y in all 70 cities in the main index except Tangshan. In 2009, sales increased 42.1% y/y by floor space or 75.5% y/y by value, which implies a slowdown in December, as sales were up 53% by floor space and 86% by value for the year through November. Real-estate investment increased 16.1% for the year, which also implies a slowdown from the 17.8% y/y pace through November. [The December y/y figures released by the National Bureau of Statistics suggest that the 2008 data was revised upward, which may explain the apparent slowdown.]

From the Bloomberg article:

How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing’s half-trillion- dollar stimulus plan all made funds readily available. City and provincial governments have been gladly cooperating with developers: Economists estimate that half of all local government revenue comes from selling state-owned land.

Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively. Companies in the chemical, steel, textile, and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business. …

It’s not encouraging that the Chinese have been ham-handed about stopping previous real estate frenzies. In the 1990s the government brutally ended a bubble in Shanghai and Beijing by cutting off credit to developers and hiking rates sharply. The measures worked, but property prices plunged and economic growth slowed. …

“Once the bubble pops, our economic growth will stop,” warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences’ Finance Research Center. On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that “property prices have risen too quickly.” He pledged a crackdown on speculators.

This one will end badly. It will have a negative impact on the U.S. economy as their economy slows.

I recommend the following articles:

China Property Bubble May Lead to US Style Real Estate Slump

Sizzling Shanghai Homes Defy Tax Bubble Concerns