China Law Blog

I think you should wait until the olympics ends because it may be that the prices will not go too much down but their must be some fall.

Good post. I don't know about BJ, but I know Shanghai very well. The Shanghai market has been called "overheated" for several years running now, and there is a large glut of empty homes, yet construction continues apace. Thus far the real estate market has been pushed by new construction, but once the second-hand market matures, the overall market will level off.

I mean, a glut of ten or twenty year old apts would be one thing, but buidings that are under 10 years old will start to look more and more atttractive to buyers who want to avoid getting gouged. What's more, the median age for marriage is moving up and up. 5 years ago, people in their mid-20s had to buy a house, as they had to get married. Younger people feel less pressure to get married young (or they are more resistant to the pressure) so they don't need to buy a house right away, they can rent. And before, people didn't have to choose between paying a car note or a house mortgage... now they do, and with a car note, you are much less likely to buy. at least asap.

I suspect there are two forces at work - govt forces trying to cool the market, and people with vested interests (usually also govt peeps) trying to keep the bubble growing, cuz that's how they make all their money. This cannot keep up forever, and definitely the bubble will burst. How long can the Shanghai market depend on wealthy out-of-towners - be they from Wenzhou, Taiwan, Japan - propping up empty buildings? Anyone driven through Pudong lately? It looks amazing, with so many new buildings half empty, uncompleted, etc.

Serious trouble is brewing, I predict. And the vaunted 2010 EXPO can't do diddly to save it.

Real estate is a bubble which the authorities have no interest in bursting. Real estate and infrastructure are "investment" which is the leading component of China's GDP growth. If that bubble pops, headline GDP will be harder hit than most realize. The existing oversupply means China could under-perform growth projections for years.

Still there's a limit to investment and to be sustainable real estate must generate sufficient revenue. Calling the end to a bubble is largely guesswork, but it looks like this gravy train has already run its course.

Of course, it's the demand not the Olympics that has been driving up the prices of real properties in Beijing. However, the demand is waning. Because the high flying prices far exceed the growth of income and the government is expected to continue to tighten its monetary policy. Real estate developers are short of cash now. People have been hesitant and looking at what is happening. It seems the winter is just around the corner.

To buy property in Beijing now? A 'No' from me.

I think it's a big NO for residential property in Beijing right now.

First, I agree that rental prices are out of whack with sales prices. Renting is pretty cheap; and property yields are correspondingly low. The large number of "for rent" signs in apartment windows around Beijing tells is pretty suggestive.

Second, whether or not the Olympics have artifically boosted housing prices, there's no question that speculation - and the naive belief that prices can only go up - is rife. After all, very few Chinese have ever experienced a property crash - the residential market only really took off from about 2001.

Third, property prices are high partly because most ordinary Chinese lack good investment alternatives. Where do you put your cash? In the bank? Negative real interest rates. In Chinese stocks? Hardly appealing right now, and the limited availability of financial products means it is extremely difficult to manage risk. Overseas? Not a practical option for most people. Housing is the logical investment...

Fourth, and perhaps most important, quality. It's getting better, but what are most of today's new apartments going to look like in ten or even twenty years?

Fifth, I personally prefer freehold. I'd be interested to know how much the 70-year lease is factored into Chinese house prices. I suspect that property here is valued as if it were freehold - another sign of a bubble.

Sixth, Beijing has fewer supply constraints than Shanghai. I know the link with house prices is a complex issue that is also affected by regulations, and competing demands for use, but Beijing doesn't seem as short of land as many other Chinese cities.

Like most things in China these past few years, I suspect that property will continue to defy gloom-mongers like me for some time. But the higher it goes, the worse the eventual shake-out will be.

the higher ups is trying to cool the market and deflate the bubble slowly, but the local government officals makes tons of money off of real estate and would hardly want prices to fall, even slowly.

prices will fall, albeit in fits, because of market interferences