Jim Chanos Was Right: The Housing Market in China is Crashing

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Apr 21, 2011
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“Whatever goes up must come down.”

That is the general law of gravity, but it is surprisingly true for the real estate market too.

It happened in the United States, it happened in several European countries, it happened in Dubai, and now it seems that the reality is being witnessed in China. After going up steeply for the last few years, now the housing prices in Beijing, Shanghai and in the other cities have started to come crashing down. In March, the real estate prices fell by a staggering 26.7% from February. But this is not just a one-off month. The housing prices have actually come down by 50.9% over the last 12 months.

Jim Chanos was one of the first to sound the alarm. At the time, people thought he was a fear monger, and was dead wrong. The argument went that China is different because down payments are so high, and the economy is booming, etc. The “this time is different syndrome” was rampant both in China and abroad. Now, almost everyone agrees that things are getting out of control in China; the question is, "Will the Government be able to stop it? And how bad will the crash be?"Let us take a look at the housing market in China to get a clearer answer.

Housing is still scarce in many populated cities of China. In fact, Shanghai, Beijing, Guangdong and most of the other major Eastern areas are overpopulated, and they are bursting at the seams.

There are many reasons why the Chinese real estate market has been booming for the last few years. First, the financial sector here is quite limited — the investment options here are quite limited. Because of this, many people believe in buying property to maintain the value of money. Also, there are hardly any social security benefits and state pensions in China too. So, investing in property in anticipation of price rise is a way of saving for the future.

Interestingly, those with money in China believe in purchasing multiple properties. Typically, a person would buy one in the city center, and another one outside. And there are those who are always open to upgrading by selling off an older property and purchasing a new housing unit. So, a lot of apartment complexes and condos have been coming up, and most of them were being sold off even before the construction was complete.

The booming housing market has been driving China’s economy too. In fact, residential property investments accounted for 6.1% of the country’s GDP in 2010. Interestingly, housing accounted for a large percentage of U.S. GDP in 2005 when the housing industry was booming here, before it all started to crash down.

So, the warning bells have been ringing for some time now. Citigroup’s (C) research head in China, Shen Minggao, had warned investors that the property market was about to enter the bubble stage, and that the bubble was bound to burst. This level of growth was just unsustainable, he said. Some people believe that based on things like rent to income, and other statistics, the Chinese housing market is in a worse position than America's was pre-bubble.

One reason for this is because of the fact that, unlike the U.S. market, China’s housing industry is not very regulated (although, regulation in the United States was extremely lax during the boom in the United States) and is quite inexperienced as well. According to estimates, there are about 25,000 real estate broking companies that employ more than 200,000 agents in China. There are also 20,000 property management businesses that employ about 2 million people. Many of these companies do not have a license and the necessary qualifications. In a recent survey, it was found that out of 4,000 real estate businesses in Beijing, just 700 had the license to carry out business.

The global economy has definitely gained because of the growth in China’s housing market, but if the bubble bursts, which it now seems might be happening already, then it could be bad news not just for the country, but for the economies of other countries as well.

With clear signs that the bubble is already bursting, the authorities in China have started to take steps.

As a law, state data cannot be released to the public if it is not from the government. So when the data in March was published on the Internet, that the real estate prices have fallen by 26.7%, it was severely condemned by Shen Laiyun, who is the spokesman of the National Bureau of Statistics in China. He warned of legal steps. He mentioned that the official data will be published soon. But experts say that this data of a 26.7% fall in March, and the 50.9% fall over the last 12 months is indeed correct.

Honestly, the government has been taking note of the spiraling prices and has been taking steps for some time now. In 2010, steps were taken to halt the buying of second properties. The minimum down payment to be made was increased. New taxes have also been imposed on buying properties in Chongqing and Shanghai. Third mortgages have been banned. Interest rates have been hiked two times in the last four months alone. Local governments have been told to establish price targets on new properties that are coming up. Some other restrictions have also been imposed on bank loans.

So, the government is definitely sitting up and taking notice. But is all this too little, too late? Only time can tell us. But one thing is certain, and this is that the bubble in China’s housing market has definitely been getting bigger for some time now, and it has already started to burst.

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