China is indeed in the midst of an epic housing bubble - Politics Forum.org | PoFo

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I apologize in advance if this post is bare of information.

I arrive at this post after several years of contemplation, during which I consistently heard of this housing bubble thing in China, but was consistently skeptical.

Most of what I have gleaned on the situation is through conversation, and direct observation.

These days in cities like Shanghai, Beijing, and Guangzhou, one will easily pay more than a half-million US dollars for a modest apartment. When you compare this to cities like London, San Francisco, New York, etc., this might seem modest. But consider the fact that renting an apartment is far, far less; to the effect that buying-to-let is not at all profitable. This divergence is a fair indicator of the situation whereby a bubble is persisting.

Other indicators include cost of living: You can buy a meal for a few dollars directly underneath these half-million dollar modest apartments.

For a concrete anecdotal example: I'm aware of a two-bedroom apartment which was purchased a bit far from Shanghai, in a pretty small city (by China standards) for $220,000. The cost of rent for this particular flat is about $250 per month.

I first heard of this housing bubble while living in Japan, and I was in part skeptical because I thought Japanese were projecting with respect to their own past experience; while at the same time hopeful of a bad outcome for China. My thinking was misplaced.

The situation is partly rooted in the convalescents of cultural circumstances and straight logistical considerations. On the latter point, China has a very large population, and the cities are densely populated. On the former, there is a strong prerogative in China for a married couple to own their home. A fair number of parents will buy a home for their son, so that he may be attractive to a bride. The thinking is that a man must own a home and a car, to be marriage material. In other cases, the man will strive for the ability to buy these things, on his own.

This also puts downward pressure on the rental market--as well as does ability to pay; in China many people are still relatively poor, by global standards. In addition, there may be some rent control in place, although I am not completely certain.

Nonetheless; the situation would seem to be such that it is more economical to rent than it is to buy. One year's worth of rental fees will likely pay for less than 2-months' worth of mortgage payments.

The purpose is not to advocate for higher rent; the purpose rather is to refer to rent as an indicator of true worth.


What is wrong with a real estate bubble?

The problem has to do with how wealth can become tied to property; and the readjustment of the real estate market can imply absolution of much wealth. The US has experienced this in recent memory, along with West Europe, and beyond.

Under Chinese State-Capitalism, this has implications for the Central Government as well, which owns a lot of real estate; and much real estate is constructed by State-Owned Companies.

China has never really experienced a true economic recession. They have successfully mobilized the resources of the State to counter the effects on employment and business failures typical of a true economic recession. This is a credit to the Chinese economic system (which is a system which is not faultless by any stretch, but this is still a credit).

If/(when?) a true recession does occur in China, people could fail to pay their mortgages, en mass, and a crisis could ensue. This is essentially what happened in the US (and West Europe).

Moreover, such a case could directly affect the fiscal stability of the Chinese government, because of its own vested position in real estate.

It is, moreover, a situation which is complicated by the status of real estate as an investment commodity, which is dependent on growth. People buy apartments and houses, in the expectation they will appreciate in value, and offer a return.

I think China should be considering reforms in the real estate market. The building boom is perhaps even an attempt at this, through increasing the supply (but it actually often has the opposite effect, in the way of gentrification--brand new high rises sell for a disproportionately high amount, while displacing older, cheaper housing).

It may be prudent for the Chinese government to limit ownership of houses, beyond one domicile, until the situation can calm down. They may be doing so. But this too is complicated by the situation whereby one can buy houses for their extended family--a situation which is tenuous to restrict--but which is also often worked.

A housing crisis in China would have reverberations around the world. The situation of housing is complex, and is complicated by many factors. We don't know what the future holds, but I am hoping for some sort of smooth adjustment going forward.

Even a public campaign to encourage people to consider renting rather than owning, could potentially have good effects.

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