Gordon Chang on China's Coming Property Bust

Read more at China Bubble

Gordon Chang:

“Even if I don’t eat for the next 50 years, I still won’t be able to afford a flat in Shenzhen.” As we were stuck in traffic last Sunday in his bustling hometown, a cab driver has just identified why the Chinese property market is the world’s biggest bubble at the moment. He makes a maximum of 4,000 yuan a month, but an apartment for his wife and two children will cost about 250 times that amount. The chubby dad has given up dreams of owning his own home in this southern China metropolis that borders Hong Kong.

Prices for apartments in China are seriously out of whack. They were rising this year at the rate of 20% a month in some regions. Overall, residential real estate prices soared 68% in the first quarter of the year, compared to the corresponding period last year. In the second quarter, prices were up 12.2% from the first quarter, according to Nasdaq-listed China Housing & Land Development Inc ( CHLN – news – people ). China is the world’s fastest appreciating property market.
So everyone recognizes that a correction must come soon, right? Not exactly. “I don’t see any bubbles,” 44-year-old Zhang Xin told Hong Kong’s South China Morning Post ( SCHPY.PK – news – people ). “The next few months will be a fantastic time to buy.”

Really? There were, a few months ago, 64.5 million urban flats that showed no electricity usage for six consecutive months. That’s one in four city apartments, enough housing for some 200 million people. The value of vacant apartments held by speculators is about 15% of gross domestic product. Beijing’s bank stress tests assume a 60% fall in property prices. In fact, official statistics show that property price increases slowed in July.

And there is more bad news for the residential market. Property developers, who are already building 20 million flats, have company. Local governments are constructing another 20-30 million, and other government agencies and companies are also building housing for employees.

In any other country, developers would be slamming on the brakes. In China, they are hitting the accelerator. Ms. Zhang, , a one-time sweatshop worker who has since become a billionaire by building some of the most striking structures in China, is committing hundreds of millions of dollars to construction in Beijing and Shanghai.

Welcome to China, where universal economic principles do not seem to apply. Why are Chinese developers so optimistic? They assume that central government technocrats will soon abandon their efforts to cool the economy…

…The overriding reality is that China’s incomes will not support housing prices at their current level, so there must eventually be an elimination of this gap. Because incomes cannot grow fast enough, prices must fall. Yes, the government will try to sustain the market, but Beijing’s measures are not stronger than market forces.

Chinese leaders, in the months ahead, have an impossible task. They must keep powerful property developers happy, not alienate hundreds of millions of Chinese who think they should be able to own their homes, and somehow repeal the law of supply and demand…

Read the original story at Israel’s Financial Expert