Lately there has been concerns about the real estate market in China and its impact to the United States and the rest of the world. We just experienced the results of the housing bubble and credit meltdown and its ripple effect to the rest of the world. Now there is talks about the bubble in the real estate market in China. Could this be a China Tsunami causing damage to the prospect of recovery we are foreseeing in 2010 and beyond? Here is a couple of economic data I found out about China's current situation:
1. China has been experiencing real estate and food price increases, causing concerns of inflation in this country. For example in Beijing, the housing price per square meter is equivalent to seven months' salary on average. Statistics from Goldman Sachs showed that over the past six years, the housing price hikes had outpaced income rises by 30 percentage points in Shanghai and 80 percentage points in Beijing. To those who think there is no housing bubble in China, average home price in Chinese cities rose more than 50% from Jan. 2009 to Nov. 2009.
2. The concerns about inflation, has driven the China’s central bank to issue a fiscal stimulus over fears that asset bubbles and inflation could destabilize the economy. Sounds familiar?. The People’s Bank of China began selling the 3-month Bills at a slightly higher interest rate Thursday for the first time since August, a move aimed to controlling the excess liquidity brought on by over $1 trillion in new loans issued between January and November 2009. This action is expected to avoid the the lending binge of 2009 as policymakers attempt to prevent the nation’s economy from over-heating. Potential mortgage meltdown?
3. The New York Times reports that super-star short seller James Chanos (who bet right on the collapse of Enron)has now set his sites on China's real estate market. Chanos views China as "Dubai times 1,000 - or worse" and suspects that Beijing is faking its reports of 8% GDP growth, according to the New York Times.
4. China has relied on massive stimulus and loose credit to register 8.9% year-on-year growth in the third quarter, by the far the most impressive growth of any major economy. This has created a spike in the housing starts in China of 194% in 2009, and 90% of the new supply is targeted towards the luxury market. This situation resembles some of the scenarios we lived during the real estate boom in the United States. For example, the average apartment of 1,000 sqft in Beijing sells for 80 times the average income of that city's residents. If you recall we went through that situation right before the meltdown, we had an excess of homes for sale with "lots of equity" due to price increases in real estates. This motivated the banking industry to relax the lending requirements to keep the party going. The problem is that this can lead to excess inventory being held as investment property speculation generating no cash flow. Real estate bubble bursting?
Now, you may be wondering about why am I writing about China's real estate market, economy and potential real estate bubble in that country. First, as we learned from our recent real estate bubble and mortgage meltdown, the impact had a worldwide ripple effect. Many of these countries are all tied up and the fall down of one of them has negative impact on another country. China and the United States are locked in a sort of economic partnership, in which we need them to lend us money and they need us to buy their low-priced products. China is becoming one of our sources of financing in this crisis by buying real estate, investing in our banking system and becoming a lending source to our country. So if China's economy gets into trouble, the U.S. will feel the effects. That's why we as real estate investors in the United States should care about a potential real estate bubble in China. The concerning part I see is that the information about a China bubble is compelling. The question now is when will the bubble pop and how China will react?
On a final note about this subject, China's real estate industry and potential bubble differs from the United States in at least one crucial respect, the U.S. financial crisis was a result of the securitization of mortgages, but China does not follow this practice. Therefore, the impact of a bursting Chinese real estate bubble would likely be lesser in degree. However, if people who borrowed money could not pay it back, China might need to scramble to raise cash to keep its banks above water. Banking system meltdown? Since the banking system in China is owned by the government, there is no option of a banking bailout program like the one of the United States. In that case, they might sell part of its $2.2 trillion in U.S. debt, which would likely drive up interest rates in the United States. Yes you heard me right. How can that be? The selling of that debt would increase the supply of U.S. debt on the market at the same time that China's demand will be reduced or eliminated (China wont be lending to the United States to be able to address its internal economic situation). This will force the United States to seek financing from other sources potentially at higher interest rates, such higher interest rates could lead the U.S. into another round of economic contraction as a greater portion of our GDP goes to paying higher interest payments on the debt.
This purpose of this article is not to act on fear, it is to be informed and make sound and prudent business decisions in our profession.
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