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China Radio: Real Estate Bubble?

December 26, 2009

Two days ago, on Christmas Eve, I was back with Chris Gelken on China Radio International talking about the hot topic of recent weeks, whether there’s a bubble in country’s real estate sector — and if so, what to do about it.  We covered some good ground in an hour-long discussion, and I highly suggest that anyone who has been following my blog posts on the subject might want to listen in by clicking here (and selecting the first hour). 

Some of the more important points discussed include:

  • The main driver of mounting housing prices in China isn’t short-term speculation (“flipping”) but longer-term stockpiling of empty apartments as a “store of value,” like gold.
  • If “flipping” were the main problem, we’d see a much more active secondary market.  In fact, China’s secondary market is quite weak, suggesting that new housing is being stockpiled off-market and not being priced.
  • This phenomenon is partly due to a limited range of other investment options, and partly due to low holding costs, particularly the absence of an annual property holding tax.  Other holding costs, such as maintenance fees, can often be minimized or avoided entirely.     
  • Because it addresses the wrong problem, the government’s new tax on speculative “flipping” is unlikely to have much impact, and may actually make things worse by increasing the incentive to holder vacant property longer.
  • Local governments in China depend on land sales for as much as 40% of their revenue, so have a keen interest in keeping prices high — in effect, a kind of “hidden tax.”  The point of an annual property holding tax is not to increase the overall tax burden, but replace this revenue stream with a more rational and sustainable structure that rewards productivity.
  • The so-called “affordability ratio” in China is sky-high.  As a result, the unaffordable price of housing is already becoming a hot social issue in China (for more details, check out my earlier post here).
  • Even though many people are spending cash to stockpile vacant apartments, there is plenty of hidden leverage in the market.  The commercial real estate sector is highly leveraged, and most business loans in China have been issued based on high-priced real estate as collateral.  The exposure is not the same as in the U.S., but is serious nonetheless.
18 Comments leave one →
  1. bill permalink
    December 26, 2009 9:52 pm

    A property tax won’t hurt in trying to moderate the bubble, but I think you are overstating its impact. Unless it is well over 1% annually, I just don’t think it will be much of a burden for most of these buyers. Several local real estate developer friends I have spoken with in last month don’t think a property tax will have much impact, other than at most a short term emotional one; it will just be priced in as the cost of owning property here, which as you say is seen as one of the best stores of value in a market with limited investment alternatives and increasing fears of inflation;

    As for the impact of the revised transaction tax, the impact through the end of the year has been a massive spike in secondary sales, at least in beijing as per this xinhua article tonight: 投资客抛售房源 二手楼市现”末班车”效应 it will be interesting to see if seasonally adjusted transactions fall off a cliff in january

    As to using an annual property tax instead of land sales to supply a large percentage of municipal revenue, why do you think the tax would go into local rather than central government coffers?

    I think the government may end up restricting both foreigners and non-local purchases, or tax them more; i.e if you are from Taiyuan or Hong Kong and buy in Beijing you pay several multiples in taxes/fees what a local Beijing resident pays. Beijing and to some extent Shanghai real estate are national markets and have been bid up by rich Chinese from cities all over the country who want to have a place or places in the capital and the financial center. And the hot. RMB betting money from overseas, especially Hong Kong, into the real estate market is out of control. And I think you can trace a noticeable spike in higher end Beijing and Shanghai prices to the decision June 1 2009 to drop the restriction on foreign purchases;

    I also expect much more emphasis on building public housing estates, similar to Tiantong Yuan in Northern Beijing or what you see in Hong Kong. The CCP has stayed in power by “delivering the goods”, and increasingly one of those required goods for urbanites is affordable housing. As you say, not resolving this issue could lead to serious social stability problems.

  2. Bob_in_MA permalink
    December 27, 2009 2:22 am

    “Other holding costs, such as maintenance fees, can often be minimized or avoided entirely. ‘

    Here in the U.S., these costs (say condo association fees) probably average about .5% of value per year. How can a Chinese owner avoid them entirely?

    • December 28, 2009 12:02 am

      RE: Bob_in_MA:

      There is an association fee (物业) that can’t really be avoided.
      Shanghai apartments I’ve stayed in over the years have association fees ranging for $500 – $3000 USD/year.

      There is more incentive in China to cut corners on construction than in the USA because:
      1) a percentage of the savings can be secretly shared between project mangers and suppliers
      2) local customers are extremely price sensitive
      Additionally, there is very little investment in facilities maintenance, so buildings appear to age far quicker in China than in the USA.

      Other than the association fee, which basically goes to cover maintenance of the common grounds and the security guards, all other fees can be avoided. Completely neglected buildings are especially common for “single family detached” units.

      Jim Rogers just said the following:
      “A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them”

      Sure makes the Chinese real-estate market sound like a bubble to me. The CCP has a lot of flexibility in terms of management that other gov’t don’t necessarily have, but inflating your way out is probably not an option as so many poor near the poverty line would be severely impacted.

      • prchovanec permalink*
        December 28, 2009 1:30 am

        Even association fees can be avoided in some cases. Most apartments in China are purchased as an empty shell. In our building, at least, we didn’t have to pay our association fee until we completed renovation, a process we purposely delayed for almost a year. Many of our neighbors, who purchased their units before us, have not yet finished renovating (a process that seems to be drawn out and takes forever) so presumably they haven’t paid association fees for more than two years.

        Keep in mind that the “association” fees are virtually never going to an actual condo association, because there usually aren’t enough residents to meet the quorum or if they are they don’t care. The fees go to the developer who runs a management office. And with prices the way they are, most developers are happy to absorb a few years management fees if it means selling out the building more quickly and being able to releverage and move on to the next project.

        The point is, holding costs can be minimized, one way or the other.

  3. bill permalink
    December 27, 2009 10:32 am

    Interesting article today from Soufang, China’s leading real estate portal, recommending 8 policy prescriptions to moderate the real estate market. 楼市热销下想让高房价止步 八大“药方”供参考

    No. 4 is about property taxes. It says in the current discussions the rate would be between .8%-1% annually, not enough in the author’s opinion to make a dent in speculation. But if the suggested tax were to rise to 2-3% then there might be an impact. Not sure what the author is referring to when talking about also adding “progressive taxes”.

  4. Baychev permalink
    December 27, 2009 10:59 pm

    Something you did not mention: artificially high real estate prices decrease overall consumption and GDP growth. The excess money could be spent on other consumer goods, restaurants, entertainment, etc. The velocity of money would multiply the effect on GDP growth and overall prosperity. Right now, the extra money paid for housing goes to property developers who would at best buy a foreign luxury car and park most of the cash in overvalued land and possibly hold many housing units unsold in greed for more profits.

  5. Matthew permalink
    December 28, 2009 8:23 am

    hi, one question: HSBC economist Fred Neumann argues that there is no such bubble in China, because the LDR ratio of banks has hardly increased over the last year, and argues that a lot of the lending was simply to SOEs that redoposited the money back into the banking system, thus generating growth in both loans and deposits, without much increase in the overall LDR. Certainly there is some leakage from second tier and smaller banks, and from hidden leverage — loans not yet drawn down to pay for apartments still under construction, or financing from developers rather than from banks. Still, how can we reconcile this lack of leverage at the systemic level, with the broad anecdotes of the Chinese real estate bubble?

  6. Vincent911 permalink
    January 4, 2010 7:34 pm
    UBS also reeled out a number of arguments that property-bubble fears are overblown. For affordability, it’s not the average urban resident that matters but the rising middle class. And to date, mortgage lending as a proportion of GDP has not increased, which is common when a bubble is reached.

    I hope what they said above is true.
    What do you think ?

  7. January 4, 2010 9:52 pm


    The guys at UBS probably had a buy on Enron just before it collapsed too.

    > “For affordability, it’s not the average urban resident that matters but the rising middle class.”

    According to CASS, 85% of Chinese can’t afford a house. If that’s true, perhaps UBS is saying that the remaining 15% are the “middle class”.

    However, the houses that that “middle class” can afford are not the houses that have been built, purchases and effectively “put in inventory” here in China over the last 10 years with ever increasing speed. The inventoried dwellings are beautiful apartments and single family detached units that are far, far beyond the reach of the “middle class” Chinese.

    Perhaps what the folks from UBS are trying to say is: “The ‘rising middle class’ (which is composed of top 0.5% of the population) still has access to significant capital that they would like to continue ‘investing’ in additional unused luxury dwellings rather than low yield savings accounts or an unpredictable stock market”.

    > “mortgage lending as a proportion of GDP has not increased”

    If you are assuming a market economy with freely tradable currency, then perhaps this statement is correct.
    However, China is still very much a centrally planned economy, and the gov’t portion of the economy has been growing rather than shrinking. This brings up the very real “Quality of GDP” question that Patrick wrote about earlier:

  8. Vincent911 permalink
    January 5, 2010 1:35 am

    @Ryan Erwin

    I was reading stories at for the last 5 hours or so then come back to this blog and hit F5. What a coincident!

    From what you said above I could not find the answer to my REAL question.
    Is there a real estate bubble in China ?

    Please let me know YES or NO. Thanks.

    P.S. during the last few weeks I have spent most of my online time reading prchovanec

    • January 5, 2010 3:30 am

      Vincent, YES, I think it’s quite evident that there is a bubble, but when the bubble will end is not as evident. I doubt the gov’t will move agressively against the bubble (they want 8% GDP growth at almost any cost – even if there is no long term benefit), and as Prof Chovanec has pointed out, many wealthy Chinese investors trust that real estate is their best investment (source of demand). Additionally, foreign exchange is tightly controlled, so getting profits out (especially after the bubble bursts) may prove very difficult.

      Just remember:
      “The market can stay irrational longer than you can stay solvent.”
      -John Maynard Keynes

      • Vincent911 permalink
        January 5, 2010 4:12 am


        I am a very selfish man.
        What I care most is the well being of myself & my family members.

        For the last 29 years I worked more than 12 hours a day, 350 days a year mostly in front of the terminal (aka monitor).
        (under 10 minutes commuting time when I worked for someone else. zero minutes when I worked for myself.
        breakfast, lunch, diner at my desk. sleep in my office in Hong Kong or factory in Shenzhen)

        My belief is that inflation is a sure thing and house price will increase in value over a long run.
        I think that if the house price in China increases more than 2.50% a year, I would be better off NOT putting money in saving a/c.
        I have saved enough to buy a few apartments in Shenzhen & Hong Kong with my retirement cash in hope that when I am gone my
        family members will benefit from it.
        Some of them are still bared for more than two years because of the low rent income & the hassle.
        I am now very nervous if China really has a real estate bubble as you said it does.

        Reading the web during the past few months (business is very slow, I spent more time on the web than on work now),
        I feel that selfish people like me, buying houses & letting them empty, are being condemned for causing housing unaffordable to
        millions & millions of people.

        My other questions are :
        Should the Chinese goverment be encouraged, advised, to enact some kind of laws to financially punish selfish people like me ?
        Should the people like me continued to be condemned ?
        If you are in our position what would you do with you money ?

        Any answers and/or suggestions are appreciated.

      • Vincent911 permalink
        January 5, 2010 6:50 am

        @Ryan Erwin


        The Japanese call mansion for what the American call apartment.

        In ’70s, in Tokyo an apartment is a room for rent of the size of 3, 4.5, or 6
        Tatami mats of 3×6 feet each (6, 9, or 12 or so sqm).

        Almost all apartments in Japan are in low-rise wooden house with 1 or 2 story high.
        All tenants on one floor share a small less-than-1-sqm toilet.
        All tenants have to use public bathhouse sometime a few miles away.
        Rent for apartment near public bathhouse is higher than those far away.

        Based on what I have seen in Tokyo a few year ago, the situation has not changed much.

        In terms of dwelling space & condition, most people in Shenzhen is much better
        off than most people in Tokyo now.

        I don’t know if “rabbit hut” is still being used to describe the dwellings of most
        Japanese people in Japan now a day or not.

        I have been in love with China for the last 20 years. I did paid much attention to what going in Japan as long.

    • Vincent911 permalink
      January 5, 2010 5:46 am

      @Ryan Erwin

      saving-bankable income.
      I don’t know if there is a better term for it in economics (I barely passed eco-101 when in college).
      Here is my definition of it :
      saving-bankable income is the money one can put into sleep in saving account for a virtually unlimited time.

      If there are 300,000,000 million Chineses being hired to work in private business to make products or to provide services.
      If each worker enable the business owners to have $10 saving-bankable income per month then
      300,000,000 workers x $10 x 12 months = $36,000,000,000 saving-bankable income per year
      If the price of each 100-sqm apartment (a paa to in Japanese, I went to college in Tokyo in early ’70s) is $200,000 then
      $36,000,000,000 / $200,000 = 180,000 apartments x 100 sqm = 18,000,000 sqm dwelling space per year.
      If China biggest listed developer Vanke sales 500,000 sqm x 12 month = 6,000,000 sqm/year then
      China would need at least 3 developers of Vanke’s size to satisfy the need of selfish people like me.

      Ryan, Is there anything wrong with my conservative calculations above ?


  1. Leverage and China’s Property Market « Patrick Chovanec
  2. Christian Science Monitor weights in on China bubble |
  3. TIME on China’s Property Bubble « Patrick Chovanec

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