Is there a housing bubble in China?

Rob Schmitz Nov 18, 2010

Is there a housing bubble in China?

Rob Schmitz Nov 18, 2010


Kai Ryssdal: The Chinese government won’t officially say there’s a property bubble building in its biggest cities, but actions sometimes do speak louder than words. Beijing announced some new real estate rules this week: From now on, foreigners are only going to be able to own one piece of property apiece. There are also limits on how many houses its own citizens can buy, and the government’s spent much of this past year tightening up on credit as a way to cool things off.

We’ve got our China Correspondent Rob Schmitz on the line to talk things over. Hey Rob.

Rob Schmitz: Hey Kai.

Ryssdal: So walk us through this, would you? What are the signs, how do we know there’s a property bubble in China?

Schmitz: Well, it boils down to this: If you’re Chinese and you’ve got money you’d like to invest, there’s not much you can do with it. China has a closed capital account — that means you can’t legally invest outside the country. You could put your money in a bank, but guess how much interest you earn if you put your money in a Chinese bank.

Ryssdal: Yeah, like not so much.

Schmitz: Yeah, around 2 percent. That’s less than the inflation rate. So given that limited range of investment options, property has become the safest place to park your money in China.

Ryssdal: Is this one of those things where everybody who can do it, everybody who’s got the capital is investing in property?

Schmitz: The money supply in China has increased by 50 percent over the past two years. So that’s a lot of cash sloshing around the Chinese economy right now. And with a good portion of that going into real estate. That’s pushed up property prices out of reach for most Chinese and led to fears that there’s an oversupply of real estate in China, that it’s overpriced and therefore, you’ve got a potential bubble.

Ryssdal: OK, wait. You just told me that there’s an oversupply of housing stock for a country with 1.4 billion people. Make that make sense for me.

Schmitz: Yeah, well, if you come to Shanghai and Beijing these days, you’ll see high-rise apartments as far as you can see. And many of them are just sitting there. They’ve been bought, but they’re vacant. The apartment complex where I live is a good example. In a city of 20 million, I don’t have any neighbors. The apartments on both sides of me are empty. And you see a lot of this in different urban centers in China. And the thing is, many of the country’s smaller cities out west are developing the same way. If you want to see what’s become the poster child of this problem, you can go to Marketplace’s website and take a look at photos from my trip to Inner Mongolia.

Local officials there have built a city the size of Pittsburgh with barely any people living there. So this sort of thing is happening in pockets throughout China and it’s got a lot of people worried.

Ryssdal: What about the hype though? What about the fact that the media keeps saying, “Oh, there’s this property bubble,” and people see that and they say, “Oh, I’ve gotta get in before it gets any higher!”

Schmitz: I think there’s good reason to say that there isn’t a property bubble. One is that no matter how crazy expensive properties becoming in some cities here, income levels are rising too. And many in China’s rural population are moving to urban centers where they’re going to need housing. The second reason is a simple statistic from a recent real estate survey in China: Around a quarter of all home buyers in China are paying for their home with 100 percent cash. That’s a far cry from what happened in the U.S., where you could borrow 100 percent to buy a home. That’s one of the reasons why some think that there’s no way there’s a property bubble forming. You simply don’t have the massive borrowing that you had prior to the real estate cash in the U.S.

Ryssdal: You know, the Chinese economy though, Rob, is so opaque. There must be more at play here than just simple supply-and-demand, right?

Schmitz: Yeah, I mean, there’s a lot of unknowns in the Chinese economy. And we know that many Chinese are coming up with their down payments for their properties by getting loans from what are called “underground banks.” Now, these are informal networks of friends, families, co-workers who pool money together for investments, like property. What we don’t know is how much money’s flowing through these types of shadow banks. But this is important to keep in mind, because if property prices do take a dive, these informal lenders aren’t going to provide the safety net of a huge state-owned bank. And that could increase the severity of a real estate market downturn.

Now the other unknown is what if China’s government gives its people more freedom to invest money elsewhere? Then you might see a big sell-off in the property market, so that people could invest in these new possibilities. While that might not be a dramatic pop to the bubble, it could mean a lot of people losing their money.

Ryssdal: And so what, are you going to buy over there or what?

Schmitz: Here in Shanghai? You’ve got a couple million dollars you can lend me?

Ryssdal: Marketplace’s China correspondent Rob Schmitz in Shanghai for us. Thanks Rob.

Schmitz: Thanks Kai.

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