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In China, fear of a real-estate bubble Print E-mail

Jan 10, 2010 Steven Mufson The 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 any Chinese buyer of 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 homebuyers expect that prices will climb even higher, so they are stretching to pay prices at the edge of their means or beyond. Brokers say buyers commonly inflate income statements for bank loans.

Some economists and bankers fear 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.

"It's definitely a bubble," said Beijing real-estate broker Xu Xiangdong, a 24-year-old former nightclub cashier. "But it won't break because there is lots of support beneath the bubble because buying power is really strong."

Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to cities, pent-up demand for housing and a banking system much less exposed to residential mortgages than banks in the United States or Japan could protect China, they say, from a real-estate meltdown for years to come.

If not, development firms and Chinese banks might teeter and construction could slow, tossing millions of Chinese people out of work. A real-estate bust also could shake confidence in China just when the world is looking to the country's consumers to start spending more to bring global trade into better balance.

Arthur Kroeber, a Beijing-based analyst and managing director of Dragonomics, said China's economy is "not even close" to being a bubble like those seen in Japan, which endured more than a decade of sluggish growth after prices retreated, or in the United States, which helped bring about the current sharp global downturn.

"At some point the music will stop," Kroeber said. But he predicted it would not happen in China for at least 15 years, when urbanization slows.

The bigger real-estate problem in China now is access to housing. For many people — especially the young or people moving to cities from rural areas — the dream of owning a home is more and more difficult to attain. The Xinhua news agency quoted Goldman Sachs as saying housing-price increases had outpaced wage increases by 30 percent in Shanghai and 80 percent in Beijing in recent years.

Working out of an east Beijing building decorated with Ionic and Corinthian pedestals, Xu, the real-estate broker, has seen apartment prices in the complex double in the past year, to $380 a square foot. Prices already had doubled over the three previous years. Now the sales-agent manager of a Century 21 franchise, his take-home pay is more than four times what he earned as a cashier.

Speculation has become common. Wang Zhongwei, a 35-year-old stock-market analyst who owns the apartment where he lives, bought two apartments in 2004 for investment purposes. He sold the apartments for twice what he paid and made $145,000, a fortune here.

The government has helped pump up the property market by keeping interest rates low, the currency undervalued and the fiscal spigots open. Standards for bank lending have been lax, with lending rising at a 30 percent annual pace in 2009, according to a report by the Los Angeles-based bond investment firm Pimco. Since the government exerted restraint in July, lending has risen at a slower, but still brisk, 15 percent annual rate.

The government also nudged a key interest rate higher last week.

Still, many economists are sanguine.

"One of the legacies of China's prolonged stagnant growth prior to economic liberalization is an overwhelming shortage of residential property that meets its new living standards," Koyo Ozeki said in a report published by Pimco. "It will likely take a considerable period of time for supply to catch up to demand." That wasn't true in the Japanese or U.S. bubbles.

Ozeki, an executive vice president for Pimco in Tokyo, noted that the total credit for the property sector in China has grown to 40 percent of gross domestic product, the annual value of all the country's goods and services. In the United States, that barometer hit 80 percent in 2007. For Chinese banks, exposure to real estate is less than 20 percent of assets, much smaller than in the United States. That should reduce the chances of a banking crisis.

In addition, while property prices are soaring in such areas as Beijing and Shanghai, price increases are more modest elsewhere. Government statistics say housing prices nationwide rose only 5.7 percent last year.


Chinese housing by the numbers from Los Angeles Times

Prices rose 5.7 percent last year, according to government data, although prices are soaring higher in such areas as Beijing and Shanghai.

China's cabinet, citing "excessively rising house prices" in some cities, said a 40 percent down payment is required for anyone buying a second home.

Lending increased by 30 percent in 2009, according to the Los Angeles-based bond investment firm Pimco. Since the government exerted restraint in July, lending has risen at a slower, 15 percent annual rate.

Property-sector credit has grown to 40 percent of gross domestic product; in the U.S., it hit 80 percent in 2007. For Chinese banks, exposure to real estate is less than 20 percent of assets, much smaller than in the U.S.

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