China’s Housing Prices Doubled in Last 3 Years

by Landon M. Scott

The Financial Times reports that there are 65 million vacant properties in China, prices have doubled over the last three years, total credit expanded by about half of GDP in 2009 and then again in 2010, and that real interest rates are negative (meaning it costs money to not borrow!).

All these reminders a day after my post about how the Chinese Real Estate bubble is set to fizzle rather than pop has me wanting to hedge my bets and admit that we might hear a great big popping sound in China after all.

Cheap money is again the culprit, what with interest rates across the developed world at historic lows. Whereas ultra-low interest rates after the jobless recovery of the 2001 recession led to an asset bubble in the developed world, near-zero interest rates and the corresponding commodities boom has lead to an explosion of real estate prices in the developing world, together with commodity-rich countries like Australia and Canada; the Financial Times reports that  median Sydney house prices are now 10 times median incomes, higher only than Hong Kong.

To boot, news today by HSBC’s preliminary purchasing managers’ index shows that China’s PMI (Puchasing Manager’s Index, a measure of expected industrial activity) fell to a 10-month low of 51.1 in May, down from an already low in April’s of 51.8; a PMI below 50 indicates economic contraction, above 50 an expansion.

What does this mean for real estate in the United States and here in Los Angeles? Well, particularly in Los Angeles with a large population of overseas Chinese, I know from conversations that China’s red hot (and melting?) real estate market draws money away from what is believed to be on the Chinese street a historic opportunity to buy real estate in the United States. They know prices are at all time lows in Los Angeles, but investment back home in China offers amazing returns now – they don’t want to land bank here in the US when they can flip in China and make an easy 20% return in a single year. With a blow up across the Pacific, expect increased demand here at home.

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