1. In 2016, despite high property prices and increase in property prices, Chinese customers are rushing to see show apartments.
2. Some had hoped to wait for the market to cool but capitulated (My note: This is a sure sign of bubble nearing it's burst) and bought as prices climbed week after week.
Flats in the area (northern regions of Shanghai), the once rural village of Malu, still dotted with fields and scruff wholesale markets, now costs 90% more than a year ago. "It feels like a bubble" says a real estate agent (although real estate agents are a smooth talking, self-assured lot in China, like everywhere else in the world).
3. House prices have climbed 16% in China over last year, and 32% or 48% in bigger cities.
4. Surveys indicate that 20% of the buyers are investors, and 60% are investors in core areas of mid-sized cities.
5. The worrying aspect is the increase in property borrowing by developers. Zhang Zhewei of Deutsche Bank says that developers are facing Prisoner's Dilemma; if they are too conservative, they will be squeezed out; so they choose to be aggressive.
They have driven up land prices by 66% this year, according to an index of 100 cities.
6. Sharp rise in house prices doesn't match with economic picture of China. Incomes have not been growing in the slow growing economy.
7. Many have been predicting Chinese real estate bubble burst for the last decade. However, it has not been happened.
In China, people usually don't borrow as much as in other countries. The down payment rules are strict. In China, people put even upto 50% in cash upfront. So, even if the home prices fall, they will continue to pay their mortgage installments.
On the whole, the household balance sheets are in good shape.
8. Bubble' may be a misdiagnosis. The real pathology is a severe imbalance in land supply.
Smaller cities have plenty of land, but shrinking population. Bigger cities where people want to live and work are sitting on large land banks but releasing only small plots.
Shanghai has about 1800 sq km of farm land but only sold 5 sq km of land for housing last year. The result has been soaring house prices. (My note: Mumbai city (not including Navi Mumbai and Thane) is about 500 sq km. So, Shanghai has 3 times the land of Mumbai city lying vacant.)
Why not increase sale of land? Big cities will lose their income. Land sales are a source of revenue for cities. Smaller cities are hoping that high land prices in big cities will send people their way.
So, the problem is as much political as economic. (My note: Economics will triumph eventually, although in the short-term politics may win. The bubble is likely to burst anytime. Investors will stop buying flats once they see the value of flats depreciating rather than appreciating.)
Source: Financial Express, Oct 18, 2016 (original source: The Economist)
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