China Investment Research : The Looming Chinese Housing Bubble

By Author: z.zhengfeng
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There is a trend rising up in China financial news -fear of a looming real estate bubble in China have begun to rise to the surface, alarming Chinese and Asian economic researchers throughout the regions. The IMF is warning that unless China can increase interest rates and enforce a property tax, there will be a disorderly fall in property prices. Currently, China's measures to curtail a bubble are acting like a band-aid, rather than fixing the actual causes of high residential real estate inflation. The measures taken include: suspending mortgages for third home purchases, promises to speed up trials of a property tax, and an interest rate hike for the first time in almost three years. Even still, low borrowing costs and lack of alternatives for investing led to excessive inflation in the price of houses. For China investment research firms, the alarm bells have begun to sound.

Property prices cannot rely on government measures alone to fall, according to Chinese Premier Wen Jiabaoand. The aforementioned IMF China investment research report is unsure if these measures are likely to curtail the impact on the ...
... housing market in the long term. A sign of an impending housing bubble are the fact that real estate prices across 70 cities went up 8.6% in October from the previous year.

Some critics wonder if the housing bubble is being overblown, as with any financial situation with potential political implications. China's housing bubble has a chance to be worse than the United States, which could have major implications on investing in Chinese stock. Investments in real estate grew 26% annually in China from 2001 to 2008, and prices in the market have tripled while capacity has doubled. Urbanization is a driver of housing investment trends. And, obviously, speculation is another according to leading China equity research firms.

What happens next is up in the air. In an article on Fool.com, Sean Sun, an expert on China company research, says: The housing bubble is no doubt speculative and unsustainable, but the chances of it causing a total meltdown are slim. With less credit in the market, there's a lower chance of a systemic domino effect. That's not to say people aren't going to lose their shirts, but at least they'll probably walk away with their pants, socks, and maybe even their shoes on.

Similarly, Tim Hanson, from the same article, agrees with Sean that there's a discrepancy in the real estate valuations but that he doesn't know the magnitude of that looming correction. He goes on to say, I don't expect a real estate correction, as some bears do, to obliterate China's economy, and so I am finding opportunities in defensive consumer stocks such as China Mobile. Another take: If we do see strong growth in domestic consumption, exports will become a less vital source of employment, so Beijing will be less averse to letting the Yuan appreciate. A stronger Yuan would give Chinese consumers more buying power when it comes to imported goods. It is possible also that a massive Keynesian spending program has misallocated capital and set the stage for a crisis. China definitely has a bubble on their hands. To what effect it will have is up for speculation.

Zhang Zhengfeng is a senior vice president of a multinational china investment research firm. He has extensive experience leading teams developing China company research, equity research in China and asia economic research.