We just bought property behind the Great Wall. On the good side!
I’ve been talking about the Chinese housing bubble for the last couple of months. While I am certainly not alone in this, it is a topic that I do not feel has received any where near enough ink in the press. Today there is a very good article on Vox that was linked to from the Wall Street Journal that discusses the Chinese residential housing bubble in depth. I highly recommend reading the Vox article. A recession (or even a slowdown) in China prompted by a collapse of the Chinese real estate market could have dire effects on the worldwide economy.
A key quote from the Vox article:
“China is experiencing spectacularly fast growth – so fast that many fear it is driven by a bubble – a propert bubble to be precise. Recent memories of what happened when the US housing market bubble burst make the possibility of a Chinese housing bubble a critical concern for the world economy.”
The authors go on to emphasize that there are some difficulties with the lack of data regarding the Chinese market. Private land ownership was relatively rare until the 1990s, so there is not a lot of old data. Further, the information that comes out of China is controlled by the Chinese government, so it is possible that we are not getting the full story as to what is going on.
The Vox authors (Yongheng Deng, a real estate professor at the University of Singapore, Joseph Gyourko, a professor at the University of Pennsylvania, and Jing Wu, a professor at Tsinghua University), go on to say that “available data strongly suggests that prices are quite risky at current levels, and that it would take little more than a modest decline in expected appreciation to engender sharp drops in prices“.
The authors go on to suggest that price-to-rent ratios in many Chinese cities are reaching a point that suggests prices are becoming unsustainable, and that this is often one of the signs of a burgeoning property bubble.
The conclusion of the article says that an anticipated moderate slowdown in home price appreciation could lead to a sell-off by Chinese property owners that could spark precipitous price declines. If this were to happen it could have dire ramifications for the worldwide economy, which has largely been driven by the strength of the Chinese economy for at least a year.
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