Wednesday, January 27, 2010

A New Shanghai Apartment: 68% More Expensive Now Than a Year Ago

I heard a rather disturbing story on NPR's Morning Edition while in the shower this morning.

Here is an excerpt of the transcript from National Public Radio (note, the radio version can be heard here):


New figures show that property sales in China jumped 75 percent last year as record levels of bank loans boosted purchases. Property prices rose by the fastest pace in 18 months in December, adding to fears of a real estate bubble. China has been trying to rein in speculation.

One of the places with the fastest rise in prices is Shanghai. A new Shanghai apartment now costs 68 percent more than it did a year ago, according to Knight Frank, a commercial and residential property agency.

In many other Chinese cities, prices rose by 40 percent, the agency says. Now, ordinary people fear they are being priced out of the market, while the luxury sector is soaring.

"Last year, one of my customers arrived in a BMW, lugging two suitcases. Each suitcase contained the equivalent of about $70,000. He said, 'I've brought this money to buy a villa,' " recalls James Zhuo, a property agent for Century 21 who works in Lujiazui, one of Shanghai's most expensive areas.

The coal-mine millionaire from the inland province of Shaanxi was the type of customer who was buying in 2009, Zhuo says.

Read On
68% in one year?! Even (the relatively modest) 40% thoughout the rest of China is insanity. This kind of rapid growth even puts the early 2000's US bubble to shame.

This article does a good job in highlighting how Chinese cities are already absorbing a massive amount of people flowing in from the Chinese countryside. That migration will surely raise demand for apartments in Chinese cities. That is an unprecedentedly large amount of people who'll be coming into the Chinese real estate market in the coming decades.

While saying that, so much of the growth highlighted in the article appears to be fueled by luxury apartment growth. Obviously, rural migrants aren't going to be adding to demand for those kinds of apartments.

To me, any investment or commodity or anything that grows 68% or 40% (or even an amount significantly less than these numbers) is shaky. It screams ponzi scheme or some other kind of predatory sucker operation.

And usually, those kinds of schemes end up doing something like this:

Photo from shanghaiexpat.com

The above photo is of a collapsed apartment building under construction in Shanghai this past summer.

I really want China to avoid anything remotely close to what is going on in the US. Sure, Chinese people alive today have seen things much, much worse than anything going on in America right now. But things here in the US are bad. While things are going well for Qian and me on a personal level, the US as a whole is very sick. I hope China can learn from our mistakes.

8 comments:

Mark said...

I just wanted to add that I realize that Chinese people, by and large, aren't going into debt to buy their houses. So in that sense, the US and China aren't exactly analogous.

But I do see a connection in the fact that each country's housing markets have gone awry. And the housing market plays a very big role in each country's national economy.

Hopfrog said...

Its a bubble and bubbles burst. What generally causes these incredible price increases with respect to real estate is when people place too much value on real estate as an investment vehicle. When the monthly housing payment is way above what the median income can support... POP!

In the U.S. people were constantly taking advantage of loose lending practices that were unregulated as a way of paying a mortgage that was way above their means. This created a vicious cycle until the market could no longer bear it and..... POP! Despite what a lot of nationals have argued, the government cannot prevent the POP! when it gets this out of control. The government could have instituted controls to prevent this situation, but now its too late. With China's growth it may be quite sometime before the POP!, maybe years, but it will POP!

Never buy high and sell low. Seems like common sense right? How do people keep making the mistake of buying high and selling low? Here is an example:

Any first year economics student can tell you that a tangible commodity like gold has an inverse relationship with the economy at large. So when you see a recession coming, the wise investor gets out of assets like stocks and into stuff like bonds and gold. What do you see being pushed on TV right now? Buy gold!..... ITS TOO LATE! Why are you seeing all these commercials? Because the people ahead of the game have already bought it up and now want to push it on to the average joe. As we climb out of the recession the price of gold will drop as people move their money to investments like stocks which is now 'low'. In fact, with so many people trying to sell gold, it tells me that we are probably starting the climb out of the recession, though I think it will be long and slow. But what will a lot of less savvy people do right now? They will listen to all these pundits and buy gold, then sell it later at a lower price.

andy said...

SELL!

Ramesh said...

There's a bubble for sure, but these sorts of price rises aren't unusual in many parts of Asia. I have seen similar rises in India driven by a huge scarcity of land and a massive demand as populations get a little more wealthier. Real Estate prices in big cities in both countries will match those in Europe and N America, while average incomes are nowehere near.

Hopfrog said...

I don't know if you guys watch Blue Ocean Network, I highly recommend it. Its an online TV network geared towards China and they had a big discussion about this topic.

http://www.bonlive.com/11/62/1818-real-estate-bubble-in-china-part-1.shtml

SteveInChina said...

Sure there are lots of highly priced apartments... but does anyone actually live in them? I hear plenty of stories about how so-and-so has just bought a new apartment, or somebody's brother just bought 3 new ones. They are not for living in, they are for keeping, and selling on later at a higher price. (You can't live in them, since then they'd be "second-hand", and hence devalued in the Chinese market.) A colleague told me that her cousin was rich now after buying 6 apartments in Beijing. "They're worth XXXXXXX RMB now" she said. Yeah... but its a paper profit, a theoretical profit... Tell me again when your cousin has cash in hand, after actually being able to sell on these properties at their new vastly inflated prices.
I see the high prices as a way for rich people to get even richer. They'll hang onto them for a couple of years, then flip them for a profit. In the meantime, regular people are completely priced out of the market. As a British guy living in China I find it unbelievable that on 10-20% of the salary (comparing UK to China) people are expected to be able to afford homes that are 40-50% of the value.

Hopfrog said...

Its pretty amazing Steve. The exact same things were happening here in the states and the conversations were almost verbatim the same. Here in Las Vegas we had California investors buying up houses 6 at a time without even looking at them. People were buying more home than they could afford with the assumption that they could just refinance all the increased equity from rising value and pay the mortgage that way.

Well, we know how all that turned out. Its amazing that so many in China don't see the parallels. When it all fell apart the working class could no longer refinance that house to pay for it and it was foreclosed. The investors saw no buyers for all their vacant homes. The lessons are there for those who educate themselves.

Mark said...

@Andy - AGREED!

@Hopfrog - I'll check out that Blue Ocean Network link when I have the time.

@SteveinCHina - Great point. How many empty high rises are there throughout China? They're everywhere!!

Americans were doing that same crap of "flipping" houses. Look where it got us. I hate it when people look at housing as they do a stock market.

@Hopfrog - Living in Vegas, you know better than any of us what that kind of crap leads to. The whole thing is unbelievable and it sickens me that it is happening in China.