In China, fear of a real estate bubble
By Steven Mufson
Washington Post Staff Writer
BEIJING -- With property prices soaring in key cities, many investors
and bankers worry that China has the next great real estate bubble
waiting to be popped.
The Chinese government is worried, too. On Sunday, the nation's
cabinet, citing "excessively rising house prices" in some cities, said
it will monitor capital flows to "stop overseas speculative funds from
jeopardizing China's property market." It also said that any Chinese
family buying a second home must make a down payment of at least 40
For investors, many of the usual bubble warning signs are flashing.
Fueled by low interest rates, prices in Shanghai and Beijing doubled
in less than four years, then doubled again. Most Chinese home buyers
expect that today's high prices will climb even higher tomorrow, so
they are stretching to pay prices at the edge of their means or
beyond. Brokers say it is common for buyers to falsely inflate income
statements for bank loans.
Some economists and bankers fear that they have read this script
before. In Japan at the end of the 1980s and in the United States in
2008, residential real estate bubbles ended in big crashes, battered
banks and slow recoveries. With China acting as a key engine of global
growth, a bursting of the Chinese real estate bubble could be a pop
heard round the world.
"It's definitely a bubble," said Beijing real estate broker Xu
Xiangdong, a 24-year-old former nightclub cashier. "But it won't break
because there is lots of support beneath the bubble because buying
power is really strong."
Many economists say there are good reasons for such optimism. Rapid
economic growth, rising family incomes, continued migration to the
cities, pent-up demand for housing, and a banking system much less
exposed to residential mortgages than banks in the United States or
Japan could protect China, they say, from a real estate meltdown for
years to come.
If not, then development firms and Chinese banks might teeter and
construction could slow down, tossing millions of Chinese people out
of work. A real estate bust might also shake confidence here just when
the world is looking to Chinese consumers to start spending more to
bring global trade into better balance.
Arthur Kroeber, a Beijing-based analyst and managing director of
Dragonomics, said China's economy is "not even close" to being a
bubble like those seen in Japan, which endured more than a decade of
sluggish growth after prices retreated, or in the United States, which
helped bring about the current sharp global downturn.
"At some point the music will stop," Kroeber said. But he predicted
that it would not happen in China for at least 15 years, when
The bigger real estate problem in China now is access to housing. For
many people -- especially the young or people moving to the cities
from rural areas -- the dream of owning a home is more and more
difficult to attain. The Xinhua news agency quoted Goldman Sachs as
saying that housing price increases had outpaced wage hikes by 30
percent in Shanghai and 80 percent in Beijing in recent years.
A popular television soap opera known as "Snail House" depicts two
sisters' desperate struggle to buy an ever more unaffordable home. One
sister resorts to becoming the mistress of a corrupt, married official
to get money for an apartment. Last month, after a broadcast official
said the 33-part series was having a "vulgar and negative social
impact" and using "sex to woo viewers," viewers lashed out at him on
the Internet and accused him of owning multiple luxury homes.
Working out of an east Beijing building decorated with Ionic and
Corinthian pedestals, Xu, the real estate broker, has seen apartment
prices in the complex double in the past year, to $380 a square foot.
Prices had already doubled over the three previous years. Now the
sales-agent manager of a Century 21 franchise, his take-home pay is
more than four times what he earned as a cashier. But Xu, a vocational
school graduate and son of corn farmers in Jilin province, still
Speculation has become common. Wang Zhongwei, a 35-year-old stock
market analyst who owns the apartment where he lives, bought two
apartments in 2004 for investment purposes. He borrowed from family
and friends to meet mortgage payments twice as big as his take-home
pay. But in the middle of last year, he sold the apartments for twice
what he paid and made $145,000, a fortune here.
"It's much easier than working every day to make money," Wang said. "I
work very hard and compete for my so-called career every day, but I
don't make that much money from work." In November, he bought two more
The government has helped pump up the property market by keeping
interest rates low, the currency undervalued and the fiscal spigots
open. Standards for bank lending have been lax, with lending rising at
a 30 percent annual pace in 2009, according to a report by the Los
Angeles-based bond investment firm Pimco. Since the government exerted
restraint in July, lending has risen at a slower, but still brisk, 15
percent annual rate.
Now top leaders are worried. In a year-end interview with the official
Xinhua news agency, Premier Wen Jiabao said that "as the property
market is recovering rapidly this year, housing prices in some cities
are rising too fast, which deserves great attention of the central
government." He vowed to "crack down on illegal moves, including
hoarding of land and delaying sales for bigger profits." And he said
the government would do more to provide affordable housing.
Last week, the government also nudged a key interest rate higher.
Still, many economists are sanguine.
"One of the legacies of China's prolonged stagnant growth prior to
economic liberalization is an overwhelming shortage of residential
property that meets its new living standards," Koyo Ozeki said in a
report published by Pimco. "It will likely take a considerable period
of time for supply to catch up to demand." That wasn't true in the
Japanese or U.S. bubbles.
Ozeki, an executive vice president for Pimco in Tokyo, noted that the
total credit for the property sector in China has grown to 40 percent
of gross domestic product; in the United States, it hit 80 percent in
2007. For Chinese banks, exposure to real estate is less than 20
percent of assets, much smaller than in the United States. That should
reduce the chances of a banking crisis.
In addition, while property prices are soaring in such areas as
Beijing and Shanghai, price increases are more modest elsewhere.
Government statistics say housing prices nationwide rose only 5.7
percent last year.
Moreover, China's homeowners carry less debt than homeowners abroad
and the economy's rapid growth can probably keep incomes rising fast
enough to cover mortgage costs. Kroeber said that mortgages issued
from 2002 to 2008 equaled only 40 percent of the value of housing sold
Liu Renping, a 30-year-old construction engineer originally from the
countryside of Inner Mongolia, is typical of many first-time Chinese
home buyers. After deciding to get married, he hunted for four months
before buying a two-bedroom, 900-square-foot apartment on the northern
edge of Beijing last March, even though it won't be completed until
this October. He paid $162 per square foot and took out a mortgage out
for half the money needed. The other half came from his mother,
friends and his savings.
About 30 percent of the couple's pay will cover mortgage payments.
"And my salary will increase in the near future. So I don't feel big
pressure from my mortgage," Liu said.
Since he bought the apartment, prices in that development have jumped
more than 50 percent. "I am lucky to have bought it early," he said.
"If the price was this high when I bought the apartment, I wouldn't
buy at all because it would have been too expensive and I wouldn't
have been able to afford it."
Researcher Zhang Jie contributed to this report.
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