Monday, January 10, 2011

Another Housing Bubble--in China?

In a world of bizarre real estate news, this story that appeared yesterday in Bloomberg news is strange even for now.  The headline reading, "China's Home Prices Rising, in Line with Incomes, Isn't a Bubble, CLSA Says" comes from a statement to the same effect made by Andy Rothman, who is the CLSA Asia-Pacific Markets' China macro strategist.

According to the CLSA website, CLSA is an acronym for Credit Lyonnais Securities Asia, which touts itself as "Asia's leading independent brokerage and investment group" providing "equity brokering, capital markets, mergers and acquisitions, and asset management services to global corporate and institutional clients."  The firm was founded in 1986 and today has more than 1500 employees in 15 Asian cities as well as London, New York, Boston, Chicago and San Francisco.

Now back to the headline.  A housing bubble projected for China?  According to the Bloomberg article, China has Tier 1 and Tier 2 cities.  The majority of China's urban population lives in Tier 2 cities where the prices are about 75% lower than in the Tier 1 cities--cities such as Beijing and Shanghai.   But prices everywhere are on the rise.  In November, housing prices rose for the 18th month in China's 70 cities.   Government efforts to curb the accelerating real estate market, which included limiting the number of house purchases and suspending mortgage financing for third homes, failed to stop the price accelerations.  In fact, housing prices in Shanghai rose 26% last year and Chongqing saw a 29% increases in prices.

Still, Rothman says that the rising prices are not indicative of a problem because nationwide the housing prices increased only 10% while household incomes rose 13%.  Says Rothman, "That's really a pretty healthy balance and people tend too much to focus on first-tier cities...When people talk about bubbles, they are not looking at details.  They are just looking at headlines."

All of this sounds so eerily familiar.  I remember 2003-2007, when property values were skyrocketing in California, Florida and Arizona.  In El Paso, we had investors from California who sold their properties there and came to our market looking for homes.  But we were more savvy than we appeared.  Several of our builders banded together and agreed to not let investors buy up their developments.  The real estate appreciation on the west coast was unsustainable--a market correction had to happen, but if we were careful, our real estate market would not get dragged down too.  I remember explaining to investors from California that Texas did not offer the type of property value appreciation they had come to expect, so their real estate purchases here would be a longer commitment in order to see a return on investment.

It seems ridiculous now that we really expected the bursting of the housing bubble to be just a regional event. We were blissfully unaware that a massive correction in California, Arizona, Nevada and Florida was going to affect the entire real estate market and ultimately the entire country.  And yet, the Chinese appear to be headed down exactly the same road.  According to Bloomberg, Jim Chanos, a hedge fund manager who predicted the collapse of Enron, stated last month that China is on a "treadmill to hell" because the country has used property development as a primary means for economic growth.   Still, Rothman insists there is nothing to worry about, "There are obviously individual segments of the market which have problems.  But in terms of systematic problems, I don't see it."  That sounds remarkably like the commentators on the investment shows four years ago who still insisted that the U.S. housing bubble was a myth. 

The Chinese government is going to impose new property taxes, and the central bank is expected to raise interest rates in 2011 to slow growth.  But these measures are largely aimed at speculators according to Rothman.  And with the economy growing at a rate of 9.5% and inflation capped at 4.5%, the rapidly rising cost of housing should not have an effect on China's overall economy.  At least, that's what they keep saying.

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