The Real State Of China Real Estate

Contributing author Cam Fitzgerald’s thoughtful article at Rick’s Picks investment advisory website touched on what issues including China’s property bubble might precipitate our next global economic crisis. Indeed the list of scary possibilities ranging from sovereign debt default to nuclear or terrorist wars is daunting.

Yet as you can see from my reply to Mr. Fitzgerald reprinted below, read on to understand how we can seriously doubt bursting China property bubbles will be the catalyst to hell that your grandchildren’s history books will have noted sometime in the future. While China’s real estate prices have risen like a bat out of hell causing uncomfortable repercussions across parts of China’s socio-economic landscape, the good far outweighs the bad from a business and financial perspective.

An outstanding, insightful treatment Cam, thank you very much.

As to which problem may be a catalyst to impending disaster let me help readers to rest that the supposed real estate bubble in China is not likely to be it.

“And now China, …….is itself forming what could prove to be the biggest real estate and credit bubble the world has ever seen….”

I suspect here you may be simply following the mainstream media and Jim Chanos party line on this popular item which is easy enough to refute as follows:

1. While there is a sector of the real estate market in China rife with leveraged speculation, the vast majority of China home and commercial real estate enjoys 50 to 100% equity, rather than being mortgaged to the hilt 95 to 110%. This point alone should be enough to quell your fears and move even the most ardent anti-China reader to lighten up on the China-bashing campaign, but there’s more.

2. This talk about all the empty apartments in China is also in fact empty talk; it is normal in China to choose an apartment as an asset store, keeping in mind typical property carrying costs are a pittance in the range of a $10-$50/month management fee. Back in the U.S., property ownership carrying costs are more like 3% to 7% per year on assessed value…ouch.

3. The apartment flipping speculators are a small group, not representing the braod mainstream market of China family homeowners. Most of the speculators such as the infamous Wenzhou investment groups, are so wealthy beyond what anyone in the West imagines that they too can absorb any reversals of fortune.

4. Keep in mind the size of the grey economy here in China, I mean the unreported cash economy. Unlike the U.S. where 99% of every dollar spent is known and tracked, in China the cash economy is estimated at a few trillion USD…this is a massive financial buffer and comfort to say the least.

For the most part, if China real estate prices went down 30%, they would still have plenty of equity, and still have much lower debt payment to income ratios, so such a decline in property prices wouldn’t be ruinous. Most Chinese would lament it for a moment and then take another sip of their tea while equally lamenting that the price of garlic and ginger have doubled in the past year due once again to speculators.

Click Here to Read The Original Article and Reader Comments

Cheers, Mario Cavolo
Shanghai

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