Chinese Housing Bubble Update

I’ve mentioned the Chinese real estate bubble quite a few times on this blog.  For the best perspective I’ve read on real estate and lending conditions in China, I recommend checking out this post by Mike Shedlock at Global Economic Trend Analysis.

In brief: last year there was an 80 percent increase in residential property sales in China, fueled by speculative investment made on credit.  Year-over-year housing prices in Beijing increased 60 percent from March 2009 to March 2010.  The typical home in Beijing goes for 22 times the average annual income.  Many cities have seen a similar run-up in prices.  The expansion in China has been incredibly rapid, but economic growth in China has slowed somewhat over the last several months.  It will take extraordinary economic expansion to continue to support housing at its current price level.  Take a look at the graph to the right from HSBC analysis, and tell me that it doesn’t have the tell-tale signs of a real estate bubble.

It would appear that Chinese regulators have recognized this potential bubble, as they recently conducted bank stress tests to see what affect a 60 percent drop in home values would have on these institutions’ financial viability.

Today there is an article in Financeasia.com by Lillian Liu that sheds further light on the situation in China.  From the article:

Xiao Wan bought a 65-square-metre apartment near the North fourth ring road in Beijing last year. He couldn’t even recall clearly the room layout but remembered it was the first decent enough apartment that he found fairly affordable. He hastily signed the purchasing documents, but has never lived there and does not plan to.

The 27-year-old lives with his friend near the third ring road in China’s capital city. He bought the apartment as an investment, which so far is panning out. “I bought it for Rmb15,000 ($2,214) per-square-metre; it now can be sold at Rmb25,000,” he said. “It’s good just having it.”

The above is obviously just anecdotal, but it demonstrates a mindset amongst many Chinese that is eerily similar to the 2004-2006 U.S. mindset: any property is a good investment that will only escalate in value.  It is reminiscent of people camping out in order to purchase houses in the newest hottest developments.

It turns out that one of the reasons for this mindset is that most Chinese only really have three investment options: low yield bank deposits, poorly performing stocks, or the red-hot real estate market.  With the exponential growth in Chinese real estate, one can see why this would be an attractive option.

Despite this, there are over 64 million vacant houses and apartments in China, one sign that the bubble could soon burst.

Chinese regulators have attempted to deflate the bubble by tightening credit and raising down payment requirements.  Despite this, many believe the market is in store for a severe price correction:

“The third quarter will see a significant price correction in the residential property market. We expect the downward price adjustments in the second half will be 20% to 30% in tier-one cities, 10% to 20% in the tier-two cities,” wrote Standard Chartered economists Stephen Green and Jinny Yan in a report.

The ramifications from steeply declining prices could be major.  In an increasingly global economy, the fortunes of all countries are linked to some degree.  This is demonstrated by the turmoil caused by the European debt crisis.  What happens remains to be seen, but it seems almost inevitable that this bubble will burst.