China Real Estate Activity Stalls

by Landon M. Scott

My sister-in-law and her husband flip condominium units in the Shenzhen/Zhuhai-area of southern China. Now might be a good time to exit their trades and get liquid.

According to the UK-based brokerage Knight Frank, real estate activity in China’s major cities is declining.

A combination of rising prices, tightening measures on mortgage credit, increased (planned) development of affordable housing and resident-only policies that reduce the pool of allowed buyers have combined to drive down the level of real estate transactions in the major urban centers of China.

When I was last there in 2010 I thought I had taken a step back in time to the US in 2006, what with real estate being discussed by everyone from cabbies to the upper crust of society. Half-empty office complexes towered and competed for the skyline with the ubiquitous construction crane.

But to say that the slow down in activity will lead to a plunge in prices is to attempt to take a bridge too far. A couple of reasons why we probably won’t see a complete collapse (unlike the US) of the China real estate market: real incomes are actually rising in China; Chinese pay in cash and not in liar loans wrapped up in CMBS hedged by Credit Default Swaps monstrosities; the falloff in activity in orchestrated by a “cop on the beat”; presence of capital controls make the only viable investments for most domestic capital the equity market and real estate; and China is undergoing a massive urbanization of its populace.

However, real estate prices in China, whether commercial or residential, look wholly unsustainable. Using the golden rule that if you can’t rent it out to cover your debt service/make a real positive return, you paid too much, China’s real estate market is overpriced. Expectations of further price appreciation is the real force behind current price appreciation, and at some point, like all bubbles, they will run out of suckers. But I still wouldn’t expect to see a bubble burst, but rather fizzle over an extended period. Here are some more excerpts from Knight Frank’s March 2011 report on China’s real estate market:

 

A link to the full report by Knight Frank can be found on the Reports & Info page of this website.

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