Update on the potential real estate bubble in China

The Globe & Mail has a piece on the potential real estate bubble in China. I think China is sitting on a large real estate bubble (although it isn't as serious as its potential manufacturing bubble) but many do not think so. As far as I'm concerned, real estate bubbles are due to the lack of affordability, whereas many keep claiming real estate cannot be in a bubble if there is demand—tell that to the American real estate investors in 2005, when demand was so strong that people were lining up for days to buy condominiums in Miami.

The trials of a young couple trying to find affordable housing may not sound like gripping television fare, but with real-estate prices spiralling out of control in China, Snail House was a hit when it went on the air in July. The gritty plot – revolving around two sisters trying to establish themselves in a fictional city that looks a lot like Shanghai – hit so close to the bone that Chinese authorities cancelled the show after only 10 episodes. It quickly found a new life online, where some 30 million people have viewed it.

The runaway popularity of the show highlights a dark undercurrent to what has otherwise been a successful year for the Chinese economy.

...

The high cost of urban housing has become public issue No. 1 in the world's most populous country in recent months. A recent university graduate recently became an Internet celebrity after pictures were published online of the home she had made for herself in the washroom of the office building where she works. An online poll of more than 10,000 people on the Sina.com Web portal found that 47 per cent of respondents would have an extramarital affair if it would help them get a big-city apartment.

Despite a building boom in recent years, real-estate prices in China's crowded cities are increasingly out of reach for most ordinary Chinese. Average housing prices recently hit $2,200 (U.S.) per square metre in Beijing, one-third of the average annual income in the capital, and developers have been reporting record profits even as newly built skyscrapers and vast shopping malls sit partially or completely vacant around the city.

According to one report by a government think tank, half of the property purchases in Beijing are made by people who live outside the city, and 20 per cent are for investment purposes only, with the buyer having no intention of actually using the property. In Shanghai, prices are even higher, having shot up 60 per cent since last year.

“In Beijing, about 90 per cent of homes are hardly affordable to ordinary people,” said Yi Xianrong, a member of the Institute of Finance and Banking at the China Academy of Social Sciences.

It looks like Chinese real estate, at least in the major cities, are far worse than what I would have ever imagined. Keep in mind that the median household income in China is several magnitude lower than developed countries so these quoted price per square meter numbers are totally out of this world. The quote above mentions one square meter costing 1/3 of an yearly salary. This isn't a single outlier case; it is supposedly the average! I wasn't following the situation back then but these numbers may be approaching the 1990-Tokyo numbers if adjusted for income (if you don't adjust for income then these numbers are nowhere near the stratostrophic Japanese numbers.)

If the average citizen can't afford to buy homes then prices are unsustainable. It may take a while for things to correct but the free market price will be a lot lower.