A loyal reader forwarded me a 43-page law journal article by Professor Gregory M. Stein and asked me what I thought.  The article is entitled “Is China’s Housing Market Heading Toward a US-Style Crash?” and it was last revised in late September 2012.  Stein is a very esteemed professor of law (mostly real estate) at University of Tennesse.

This abstract of the article summarizes it beautifully:

This article aims to determine whether China is heading toward a U.S.-style market crash in its housing market. Rather than attempting to maintain any suspense, I will disclose here that my conclusion is, “Who knows?” China and the United States have dramatically different histories, cultures, governments, economies, and legal systems. Anyone who claims to have a definitive answer to this question is overly confident.

My more modest goals in this article are to examine the available evidence and see which way it seems to point. The article begins by listing and describing several different ways in which the American housing market failed. It then evaluates the consequences of these failures for the U.S. housing market. Next, the article demonstrates some of the key respects in which the Chinese market differs from the market in the United States. This central portion of the article emphasizes just how difficult it is to make predictions about what might happen in one nation’s housing market based on the experiences of another nation that differs in so many significant ways. Finally, the article provides a description of some of the worrisome similarities between the Chinese and American housing markets. To the extent the previous analysis may have comforted the reader into believing that the Chinese market is unlikely to experience a downturn anytime soon, this last discussion will create some apprehension by highlighting some of the ways in which China might, in fact, be heading down the same path as the United States.

Though I was a bit disappointed that Professor Stein reached no strong conclusion (remember he is a lawyer), the article’s analysis struck me as very sound and very thorough and I highly recommend his article for anyone interested in China’s real estate market.

What do you think?

  • When I was shopping for a place to rent in Suzhou back in 2010 and lamenting the costly (and mostly empty) apartments I looked at vs. the price of the rent ($1M USD apartments renting for less than $2500USD a month), the real estate agent told me “China’s real estate will never go down”, and that sent a chill down my spine. I had sold my townhome in OC in late ’05, at the height of the bubble, and now it’s worth less than half of what the buyer got it for, and this is the kind of attitude that will get the Chinese in trouble. Though their leaders are far less concerned about spending government money, I doubt even the full weight of the Chinese government can do much about the crash if it happens nation-wide in China.

  • Nyamka

    This old chestnut revived yet again. Look, it’s very simple: China keeps its current account closed and makes it difficult for people to get money out. Therefore it just stays in China and pushes prices up. There won’t be a crash until they loosen the currency controls. Which they won’t because then there will be a crash. Comprendez?
    It’s really not difficult.

  • business china

    Prof. Stein reeally makes sense. China’s real estate market is probably really heading to a crash. Unfortunately. Thank you a lot for sharing. I think I can use it in my market research in china.

  • mbecker908

    Nyamka is right, plus, anybody who believes the Chinese books should consider joining an MLM. After having spent time in China, if they’re not the most corrupt economy on earth, they’re trying harder.

  • China Newz

    Saw the 60 Minutes piece last night about the Ghost Cities in China and then stumbled upon this article. If the Chinese government places thresholds on the number of apartments you can purchase, increases interest rates, and increases taxes on property, then speculators will stop investing in real estate for short terms gains. Think that prices can only go down. How on else is China’s new middle class going to be able to afford homes?