I’m just back from China, where everyone is speculating about, well, speculation. The hottest question in Beijing is whether the country’s real estate boom is really a bubble, and if so, when it might burst. Given the possible impact of a China property meltdown on the world economy, this is a pretty fateful issue. I can’t give you much more than anecdotal stuff. But, I must say, the market looks pretty fizzy to me.  

If conversation is a leading indicator of real estate madness, then China could be headed for trouble. In Washington five years ago, every dinner party quickly devolved into a seminar on who was buying what for how much. It’s that way in Beijing these days, too. A friend who has lived there for several years spends a lot of her time kibitzing with friends about how much apartment they can afford, where they might scare up the cash for a downpayment, and the agonies of living with one’s parents.

 Fueling the constant chatter about housing prices is the connection to relationships and family life. Women are highly reluctant to even consider marrying men who don’t own their own places. Yet, according to a recent paper published by the St. Louis Federal Reserve Bank, a typical young married couple in China would need to save their entire income for 12 years to afford a 600- square-foot apartment. This is not a healthy situation.

 Everywhere you go in Beijing, and even in neighboring Tianjin -- a city three times the size of Chicago that I had never heard of -- high-rise, high-end apartment buildings are just opening. So, too, are spanking-new shopping malls and other retail developments. But look closely and you’ll see something odd – no one actually seems to be living or shopping in these sleek new edifices. People call these “see-throughs,” and they are everywhere. 

Irrationality has become rational. China’s property boom is only partly driven by what you might call “real” factors: changes in policy two decades ago that allowed buying and selling of residential real estate; massive urbanization; the rise of a middle class, and so on.  

But what mostly seems to be propelling apartment-buying now is the fact that China’s state-dominated financial system offers so few options for savers beyond low-yielding government bonds and even less attractive savings accounts. Inflation-adjusted interest rates are negative. As a place to park your cash, that leaves real estate.  

As Patrick Chovanec, an American business-school professor in Beijing, puts it, apartments in China serve the “store of wealth” function that money performs in more advanced financial systems. Some people own ten or even a hundred apartments, “stockpiling” them as the South Pacific islanders of Yap once collected large stone wheels. With no property taxes or other carrying costs, it’s perfectly rational in China to buy and hold an empty concrete box in the sky – though I hear that the hot money has started to flow into jade and gold. Judging by jewelry prices in those near-empty department stores -- hundreds of dollars for a small pair of earrings – there’s some truth to that. 

Finally, consider the government’s role in all of this. Chinese local governments do not raise money through property taxes, as in the U.S. Rather, they make money by selling land for development. Thus, Communist officials across the country have a vested interest in an endless upward property price spiral: not only do higher land prices fund local services, but they also provide the local governments’ share of the investment that Beijing demands for each five-year plan. Yes, the central government claims to be trying to bring prices back down to earth, but, as Andy Xie of Rosetta Stone advisors writes in Ciaxin, the top Chinese business magazine: “the government has been talking about cooling property prices for three years with little effect.” To the extent Beijing ever does succeed in cooling land prices, it will be imposing a financial squeeze on local governments. 

An American guy I know who does real-estate private equity in China assures me there’s “room to grow” because prices in Beijing, though lofty, are still only about half as high as Hong Kong. This is the familiar bullish narrative. But U.S.-based Chad Cunningham at Iron Horse Capital counters that households make more money in Hong Kong, so the price-income ratio there is far lower.

I tend to agree with Chad that the prices are not sustainable if you think of apartments as something people buy to use. But if you agree with Patrick Chovanec that the actual need for housing has little to do with the current boom, then this bubble could keep puffing for quite a while.

UPDATE: Yale Law School supported my travel to China to participate in a conference on media law issues co-sponsored by Yale Law School’s China Center and two Chinese Schools of Journalism.