Two of the three largest cities in the People’s Republic of China, Shanghai and Beijing, have seen the prices of houses rise roughly 400 percent in recent years, with investor hyperactivity taking much of the blame for a rise in prices so substantial and rapid that the rank-and-file middle income citizenry of these cities are now themselves priced out of the market.
In what some are regarding as the possibility of a real estate bubble that could be as impactful as that which crippled Japan for more than a decade, or which keeps much of the U.S. on its knees presently, the rapid rise of real estate values is getting the attention of many within and without China. Many of the common denominators for a bubble are in place: low interest rates, lots of speculation, rapidly-climbing prices, and even the inflating of income documents by prospective buyers who wish to get every bit of house they can (not an entirely American habit, apparently).
Certainly there is cause for concern, or at least increased awareness of the transient condition. That said, there are some key differences between what we’re seeing now in China and what we’ve seen in other, more storied real estate bubbles-turned-meltdowns, and the differences are pointed enough that investors should discard the bubble talk (for now) as they consider opportunities in China.
For one thing, there is a simple housing shortage in many urban areas of China. As modernization continues to permeate the economic landscape in China and more of the country’s citizens concentrate themselves around the cities, the shortage becomes even more prominent. This is a key difference from other bubbles, where prices skyrocket in the face of great supply; at least an increase in prices on the back of a unit shortage is something that stays consistent with the laws of economics.
(As an aside, this is something that makes the efforts at inflating income for the purpose of securing mortgages a little less insidious than that which was taking place in the U.S. For so many years, U.S. consumers were trying to grab as much excess as they could; the Chinese, noted for their parsimony by comparison, simply want a place to live.)
There are some other important differences, as well. Overall, Chinese consumers are much less debt-laden than their counterparts in the U.S. and elsewhere, which means they have room for greater levels of mortgage debt. Additionally, the steady and continuing increase in prosperity in China means wages will continue to increase. This reality tends to mute the significance of the notation by Goldman Sachs that the increases in the prices of houses in Shanghai and Beijing are outpacing wage increases by about 30 percent and 80 percent, respectively. Unlike in the U.S., there is still plenty of room for growth in many a Chinese paycheck, which is something of acute interest to the general investor looking to China as a big component of his portfolio “engine” for the foreseeable future.
Also, it should be noted that banks in China are much less exposed to real estate than those in the U.S. and elsewhere. Residential mortgages are not securitized by banks in China, so that alone constitutes a huge difference between the potential threat offered up by a U.S. bubble (historically) and a China bubble, where developers stand to lose more than do lenders and homeowners.
It’s important to note, too, that during classic bubbles, real estate prices in nearly every corner of a country see considerable appreciation. According to the Chinese government, real estate prices rose only about 6 percent nationwide in 2009. Certainly the situation in the larger cities is noteworthy, but for the global investor concerned about the nationwide temperament of real estate in China, there may not be so much to worry about.
For now, although there has been talk of raising rates in a proactive effort to keep housing prices and inflation in check, the government’s fear of a backlash from homebuyers already at their wits’ end trying to get into a house is great enough to keep that from happening. As a result, the viability of the Chinese real estate market and the Chinese consumer should remain intact, which is good news for the investor in China.
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Bob Yetman, Editor-at-Large at Christian Money.com (www.christianmoney.com), is an author of a variety of materials on personal finance and investing, as well as on topics of fitness and self defense, to include the recently-released book Investor's Passport to Hedge Fund Profits (John Wiley & Sons, Inc; www.investorspassport.com) and the new unarmed combat training DVD Thunderstrikes – How to Develop One Shot, One Kill Striking Power (Paladin Press; www.mikereevesonline.com).