Saturday, January 2, 2010

China house prices are 80x earnings. Makes the UK look quite affordable….

China Property Bubble May Lead to U.S.-Style Real Estate Slump

Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high-rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won’t flag. And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further. In Beijing, a typical 1,000-square-foot apartment costs about 80 times the average annual income of the city’s residents.

Posted by drewster @ 02:08 PM (3310 views)
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6 thoughts on “China house prices are 80x earnings. Makes the UK look quite affordable….

  • So the Chinese are going to repeat the property price bubble experiment. No prize for guessing the results.

    The bit about prices at 80x salaries reminds me a bit of some comments posted by Uncle Tom. See 15 and 17 at
    http://www.housepricecrash.co.uk/newsblog/2009/09/blog-in-a-challenge-to-london-asian-states-invited-to-store-bullion-closer-to-home-25150.php

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  • Like the VI spin over here, I expect that a handful of property investors in China won’t have much of an effect on the property market with the other 1.3 billion unable to buy a bowl of rice.

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  • Well spotted, Quiet Guy.

    If the bubble-burst plays out like in the US then it’s bad news all round. Chinese banks will be saddled with $trns of bad debt. They’ll be scared of lending, credit will tighten up, and domestic demand will plummet. That’s bad news for the rest of the world. All the economists keep telling us that China will save our beleaguered economies and restore the balance of trade when their emerging middle-class starts buying things from us. That can’t happen if they’re going through an asset-price crash or even a depression.

    The sums involved must be huge. With house prices at 80x earnings, there’s a lot of credit which will potentially be destroyed. Even the Chinese government couldn’t bail out the banks with such large amounts. Result: banks fail, individuals lose their deposits, lose their homes, lose their jobs. No social security net to cushion the blow. How will China’s government deal with mobs of angry unemployed people?

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  • markj69 str05 says:

    @3… ‘How will China’s government deal with mobs of angry unemployed people?’ – Tanks?

    You have to remember though (Ref’ – ‘about 80 times the average annual income of the city’s residents’), the population is huge and even in the cities there are a lot of poor. I guess this exagerates the multiple rate somewhat, by offsetting the average income dramatically downwards.

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  • markj – I agree that income inequality exaggerates the effect, and indeed we see the same effect in London, albeit to a lesser extent.

    Nevertheless the figures are dramatic and it’s clear from the rest of the article that there is a bubble in full swing. Apartments in central locations (the zoned zone) have “doubled or tripled in price”, while in flatland they are building entire new cities. The bubble psychology is present too: buy one flat and rent another; buy now or you’ll never be able to afford a house. Even non-property companies are getting involved, using their cash reserves and government-gavaged lending to “invest” in property rather than build factories or train workers.

    I’m particularly saddened to see yet another country (and a big, important one at that) fall under the spell of ever-rising house prices. This article clearly shows that property-mania is embedded in the institutions: “City and provincial governments have been gladly cooperating with developers: Economists estimate that half of all local government revenue comes from selling state-owned land.”
    I wonder how many of those land sales involve kickbacks from developers to local government chiefs? Also, as in the UK, it’s not the poor who are getting rich from the housing bubble. If the well-connected are benefiting most now, they stand to lose the most too. They won’t stand idly by as the market seizes up – backs will be scratched and the government will “do something”. What’s the Chinese word for “Goldman Sachs”?

    [Ref: Paul Krugman, Flatland and the Zoned Zone, 2005.]

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  • Although prices may well be at 80X income, if as is suspected the vast majority of Chinese property is bought in cash and as a store of wealth, the relation between earnings and value doesn’t actually matter.

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