bukky Post 22 - Will China's real-estate be worse than ours?

Very insightful article. Certainly reminds one of the US real estate market just a few years ago; an insatiable middle class hungry for the status symbol of a big home beyond their budget, low interest rates to attract buyers, greedy real estate investors contributing to the artificial inflation, and the list goes on. The US is now paying a hugh price as a result- homes have lost so much value, most homeowners are forced to walk away rather than continue the downward trend, greedy banks looking to foreclose on homeowners they were quick to make loans they could not afford to, investors still looking to make money no matter the economic situation, the government trying to salvage the mess it helped make, I could go on.


Will China’s real-estate bubble be worse than ours?

Millions in China are pursuing property with a zeal once typical of house-happy Americans. The rush is fueling fears that the bubble may burst — and soon.
By Dexter Roberts of BusinessWeek

Li Nan has real-estate fever. A 27-year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700-square-foot apartment in west Beijing. Li originally planned to buy his own place when he got married, but after watching Beijing real-estate prices soar, he has been spending all his free time searching for an apartment. If he finds the right place — preferably a two-bedroom in the historic Dongcheng quarter, near the city center — he hopes to buy immediately. Act now, he figures, or live with Mom and Dad forever. In the last 12 months such apartments have doubled or tripled in price, to about $400 per square foot. "This year they'll be even higher," Li says.
Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high-rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won't flag. And if families can swing it, they buy two apartments — one to live in, one to flip when prices jump further.
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And jump they have. In Shanghai, prices for high-end real estate were up 54% through September, to $500 per square foot. In December alone, housing prices in 70 major cities rose 7.8%, while housing starts nationwide rose 34%.

The real-estate rush is fueling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets and local governments. "Once the bubble pops, our economic growth will stop," warns Yi Xianrong, a researcher at the Chinese Academy of Social Sciences' Finance Research Center. On Dec. 27, Chinese Premier Wen Jiabao told news agency Xinhua that "property prices have risen too quickly." He pledged a crackdown on speculators.

Unaffordable pricesDespite parallels with other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper middle class housing is so hot it can't be satisfied. In others, speculators keep driving up prices for land, luxury apartments and villas even though local rents are actually dropping because tenants are scarce. What's clear is that the bubble is inflating at the rich end, while little low-cost housing gets built for middle and low-income Chinese. In Beijing's Chaoyang district — which represents a third of all residential property deals in the capital — homes now sell for an average of nearly $300 per square foot. That means a typical 1,000-square-foot apartment costs about 80 times the average annual income of the city's residents. Koyo Ozeki, an analyst at U.S. investment manager Pimco, estimates that only 10% of residential sales in China are for the mass market. Developers find the margins in high-end housing much fatter than returns from building ordinary homes.
How did this bubble get going? Low interest rates, official encouragement of bank lending and Beijing's half-trillion-dollar stimulus plan all made funds readily available. City and provincial governments have been gladly cooperating with developers: Economists estimate that half of all local-government revenue comes from selling state-owned land. Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively.
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Companies in the chemical, steel, textile and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business. "When you sit down with a table of businessmen, the story is usually how they got lucky from a piece of land," says Andy Xie, an independent economist who once worked in Hong Kong as Morgan Stanley's top Asia analyst. "No one talks about their factories making money these days."