By Brian Summerfield, Online Editor, REALTOR® Magazine
Over the past few months, there has been a rising chorus of commentators calling attention to the rapid growth of real estate prices in China. Many of them have even invoked the dreaded “b” word to describe the rocketing residential values. But is China really on the verge of a bubble? Could we see a repeat of what happened here across the Pacific?
Maybe not. While there are some similarities between the U.S. bubble market of the last decade and China’s meteoric rise in real estate, there are enough distinctions to suggest that it could play out differently for the latter.
China’s real estate market has benefited from low interest rates and government attempts to boost growth — in the form of a $500 billion-plus stimulus program — just as housing in the United States did. But some of the key elements in the U.S. bubble, such as exotic mortgage financing and property flipping, are either uncommon or nonexistent in China.
As NAR Chief Economist Lawrence Yun points out, they don’t have subprime loans in China, and the downpayment requirements are much higher in that country: 30 percent for primary residences, 40 percent for second homes, and 50 percent for raw land.
“Maybe it’s just a reflection of a high-growth rate, and people moving up into middle and upper-middle classes,” Yun said this week regarding China’s real estate growth. “My guess is that it’s not a bubble, but it most likely will taper off [soon].”
Still, it’s hard not to get nervous when you read that prices in some of the more upscale parts of Shanghai have gone up by more than 50 percent in less than a year. Or stories of speculation like a recent one in the Washington Post about Wang Zhongwei, a stock market analyst who had mortgage payments on two apartments that amounted to twice his take-home pay, but managed to sell them both for a relatively impressive profit. (“It’s much easier than working every day to make money,” Wang said of the transactions.)
Also, much of the boom in China’s housing is in the luxury sector, and the apparent hubris in the naming of some of these new developments, like Palais de Fortune and Rich Gate, is really incredible. (Seriously, calling a neighborhood something like Moneyville or Bigbucksburg would have been only slightly less subtle than that.) Consequently, most of the homes are financially out of reach for the average Chinese citizen.
So why should U.S. real estate practitioners be concerned about what’s going on in China? Two reasons:
- The potential economic fallout. Business and finance are more global than ever, and economic problems are rarely confined to a nation’s borders. If the downturn in U.S. housing could cause the government of Iceland to collapse (to cite just one problem), then a severe dip in China’s real estate market could do some amount of economic and political damage internationally as well.
- Real estate’s reputation. A housing recovery in the United States and other countries is still not entirely assured, and if real estate in China collapses, it could be another major blow to the perception of the home as a sound investment around the world.
We’ll just have to wait and see if China’s high-flying real estate market comes in for a smooth landing, or crashes and burns.