In China, fear of a real estate bubble

Source: Washington Post

BEIJING -- With property prices soaring in key cities, many investors and bankers worry that China has the next great real estate bubble waiting to be popped.

The Chinese government is worried, too. On Sunday, the nation's cabinet, citing "excessively rising house prices" in some cities, said it will monitor capital flows to "stop overseas speculative funds from jeopardizing China's property market." It also said that any Chinese family buying a second home must make a down payment of at least 40 percent.

For investors, many of the usual bubble warning signs are flashing. Fueled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled again. Most Chinese home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements for bank loans.

Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.

Read more: http://www.washingtonpost.com/wp-dyn/content/article/2010/01/10/AR2010011002767.html?hpid=topnews

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China reminds a bit of Japan in the 1980s when Japanese tourists were visiting the U.S. and living large, and buying trophy properties throughout the U.S. What concerns me about China is the lack of transparency. The U.S. real estate bubble began to pop in late 2006, accelerared in 2007, then the bottom fell out completely in 2008. Though 2008 seemed sudden, I remember thinking that it was crazy the prices people were paying for homes, and the tricks they were using to get into a house. With China, you may not know, until the meltdown is well under way.

According to the article, China now has its own liar's loans complete with "zero down" and "pick a pay" features -- the ideal mix for a housing bubble as we've seen here. (Cheap undeserved credit always pumps up prices.)

Their decision to demand 40% down on second houses is a good start. If they've learned anything from our fiasco, they should also insist on at least 10% non-borrowed money down and documented income on the first house too with no more than 37% of proven household wages going to the mortgage.

It would be nice if China went the way of Japan.



EDIT: Incidentally I'm certain I remember a time in China in the 1990's where a prospective buyer actually had to but down 90% of the value of the house because of fear of what happened in Japan. So, back up to 40%? Seems odd to me.

Superficially there are similarities, certainly, but something like 2/3rds to 3/4ths of all real estate and other big ticket purchases (like automobiles) in China are done with cash. It's had to have a debt financed bubble when everyone is paying in cash. Can prices still go down? Certainly and over supply will do that but you won't find it endangering the entire Chinese financial system since most of these buyers aren't taking out loans and instead are dealing entirely with cash. Prices are still extremely low in China largely because they aren't in the debt financing system we in the west are. Either people have the cash or they don't.

China has had a MASSIVE stimulus package aimed directly at bank lending - unlike America - so if they are paying cash it is from a loan.
I think you are talking out your proverbial there mate.

There is massive speculation in Realestate AND commodities coming directly from state encouraged bank loans - have read it a million times - first time I have read that
the bubbles are not being financed by loans but rather the Chinese destroying their savings - hogwash.

Not to mention the commercial real estate bubble that no one seems to notice deflating.

The state media, ostensibly in the hands of Marxists, even glorifies the extravagant penthouses of the billionaires in Shanghai. Shameful.

...Readers may recall that it wasn’t all that long ago that China’s banks were sitting on big losses and the analysts debated how bad the mess was. In 2003, for instance, the damage was pegged at $500 billion, a stunning figure given the size of the economy, and meant the banking system was insolvent.

Even though the Western press has gotten excited about Chinese loan growth, seeing it as a sign of imminent recovery, appearances are deceiving. First, the government set targets, so loans had to be made, whether they made sense or not. Michael Pettis has reported some transactions were shams to meet the mandated goals. About 1/3 of the proceeds were estimated to go to the stock market, hardly a productive use. And the banking aurhorities themselves were recently reported to be trying to curtail loan growth, a confusing signal.

Ambrose Evans-Pritchard is even more dour, thanks to the reading a less than cheery reports from Fitch:

China’s banks are veering out of control. The half-reformed economy of the People’s Republic cannot absorb the $1,000bn (£600bn) blitz of new lending issued since December.

Money is leaking instead into Shanghai’s stock casino, or being used to keep bankrupt builders on life support. It is doing very little to help lift the world economy out of slump.

Fitch Ratings has been warning for some time that China’s lenders are wading into dangerous waters, but its latest report is even grimmer than bears had suspected….

“Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear.”

Note the phrase “able to bear”. Fitch’s “macro-prudential risk” indicator for China threatens to jump from category 1 (safe) to category 3 (Iceland, et al). This is a surprise to me but Michael Pettis from Beijing University says China’s public debt may be as high as 50pc-70pc of GDP when “correctly counted”.

The regime is so hellbent on meeting its growth target of 8pc that it has given banks an implicit guarantee for what Fitch calls a “massive lending spree”.

Bank exposure to corporate debt has reached $4,200bn. It is rising at a 30pc rate, even as profits contract at a 35pc rate…Roll-over risk is rocketing. China’s monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye…... http://www.nakedcapitalism.com/2009/06/chinese-banks-accident-waiting-to.html