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April 21, 2010

China Property Bubble and Economic Future

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The property price numbers from NBS (China's National Bureau of Statistics_ are becoming surreal.

In February the bureau announced that housing prices in 70 medium- and large-sized cities increased about 1.5% last year. The increase, we were told, was a five-year low. This was too much for even China Daily, Beijing's official English-language publication, which reported that people were saying the number "was obviously opposite to the reality."

Reality in China is that urban property prices last year could have gone up as much as 80% in some cities and by double digits in others. Moreover, they are rising this year, perhaps at the rate of 20% a month in some regions. NBS, however, has continued to understate prices increases.


The IMF is now forecasting 9.9% GDP growth in 2011 in China and 10% growth in 2010.

Motley Fool reports that house prices are very high in comparison to rent prices and to incomes House prices are about 500 times the monthly rent. A usual range for this metric is 100-200 times. However, 200-400 times is not uncommon in the San Francisco Bay Area.

City populations are growing very rapidly, so demand for housing is steady or growing. Savings rate is much, much higher in China than in the US. A very high percentage of real estate in the US, 90% or so, is debt financed. In China, 50% of real estate is bought with cash. Also, down payment requirements are very high. The requirement has been recently raised to 30% for all people, not just some. Even a sizeable drop in housing prices would not result in negative equity.


China is tightening mortgage requirements.

Down payments for second homes must be at least 50 percent, up from 40 percent, and interest rates can’t be lower than 110 percent of benchmark rates

Some statistics for China's Real Estate Market

* China property sales jumped 75.5 percent to 4.4 trillion yuan ($644 billion) last year
* By floor area, sales rose 42 percent from 2008 to 937 million square meters (10 billion square feet) (NBS stats). That compares with a 53 percent gain between January and November, when sales value advanced 86.8 percent. December’s declining sales growth reflects the seasonally slow winter period


China has reasons for allowing overbuilding to occur. They would rather keep construction workers employed rather than allow 20-50% unemployment in that sector as happened in other places. Tens of million of pissed off unemployed workers is a recipe for revolution. lChina's leadership has tools and methods at its disposal for dealing with property market problems that are unavailable to a western country. China can see an empty city and it can adjust tax and financial incentives until companies move there and fill that city. If China overbuilt luxury units they can send in the same construction army to remodel at 10% of the build cost to split units into 2-4 smaller units. China has 20-30 million people moving into the cities every year from rural areas. How long does it take to absorb overbuilding with that much new demand every year ?

China has about US$2.5 trillion in cash reserves. Based on the size of the property market and the size of the problem, it seems like they have the capacity for 2 or 3 major bailouts before they would have to start borrowing money.

My China GDP Forecast

      Trillion                     GDP Trillion USD
      Yuan    GDP            USD   China   
Year  GDP     Growth Xchange GDP   + HK
2009    33.5    8.9   6.83   4.9    5.1
2010    36.9   10     6.7    5.5    5.7
2011    40.5   10     6.5    6.2    6.4
2012    44.2    9     6.1    7.2    7.4
2013    48.2    9     5.7    8.4    8.6
2014    52.5    9     5.4    9.7    9.9
2015    57.2    9     5.1   11.2   11.4
2016    61.8    8     4.7   13.1   13.4
2017    66.7    8     4.3   15.5   15.8
2018    72.1    8     4     18.0   18.3
2019    77.1    7     3.7   20.8   21.1
2020    82.5    7     3.4   24.3   24.6
2021    88      7     3     29.4   29.7
2022    95      7     3     31.5   31.8
2023   101      7     3     33.7   34
2024   108      7     3     36.1   36.4
2025   116      7     3     38.6   38.9
2026   124      7     3     41.3   41.6
2027   132      7     3     44.2   44.6
2028   142      7     3     47.3   47.7
2029   152      7     3     50.6   51
2030   162      7     3     54.1   54.5



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