In China, fear of a real estate bubble

By Steven Mufson
Washington Post Staff Writer
Monday, January 11, 2010; A01

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 that any Chinese family buying 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 home buyers expect that today's high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements for bank loans.

Some economists and bankers fear that 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 the 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, then development firms and Chinese banks might teeter and construction could slow down, tossing millions of Chinese people out of work. A real estate bust might also shake confidence here just when the world is looking to Chinese 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 that 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 the 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 that housing price increases had outpaced wage hikes by 30 percent in Shanghai and 80 percent in Beijing in recent years.

A popular television soap opera known as "Snail House" depicts two sisters' desperate struggle to buy an ever more unaffordable home. One sister resorts to becoming the mistress of a corrupt, married official to get money for an apartment. Last month, after a broadcast official said the 33-part series was having a "vulgar and negative social impact" and using "sex to woo viewers," viewers lashed out at him on the Internet and accused him of owning multiple luxury homes.

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 had already 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. But Xu, a vocational school graduate and son of corn farmers in Jilin province, still rents.

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 borrowed from family and friends to meet mortgage payments twice as big as his take-home pay. But in the middle of last year, he sold the apartments for twice what he paid and made $145,000, a fortune here.

"It's much easier than working every day to make money," Wang said. "I work very hard and compete for my so-called career every day, but I don't make that much money from work." In November, he bought two more apartments.

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.

Now top leaders are worried. In a year-end interview with the official Xinhua news agency, Premier Wen Jiabao said that "as the property market is recovering rapidly this year, housing prices in some cities are rising too fast, which deserves great attention of the central government." He vowed to "crack down on illegal moves, including hoarding of land and delaying sales for bigger profits." And he said the government would do more to provide affordable housing.

Last week, the government also nudged a key interest rate higher.

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; in the United States, 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 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.

Moreover, China's homeowners carry less debt than homeowners abroad and the economy's rapid growth can probably keep incomes rising fast enough to cover mortgage costs. Kroeber said that mortgages issued from 2002 to 2008 equaled only 40 percent of the value of housing sold nationwide.

Liu Renping, a 30-year-old construction engineer originally from the countryside of Inner Mongolia, is typical of many first-time Chinese home buyers. After deciding to get married, he hunted for four months before buying a two-bedroom, 900-square-foot apartment on the northern edge of Beijing last March, even though it won't be completed until this October. He paid $162 per square foot and took out a mortgage out for half the money needed. The other half came from his mother, friends and his savings.

About 30 percent of the couple's pay will cover mortgage payments. "And my salary will increase in the near future. So I don't feel big pressure from my mortgage," Liu said.

Since he bought the apartment, prices in that development have jumped more than 50 percent. "I am lucky to have bought it early," he said. "If the price was this high when I bought the apartment, I wouldn't buy at all because it would have been too expensive and I wouldn't have been able to afford it."

Researcher Zhang Jie contributed to this report.

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