The document discusses China's housing bubble which began in 2005 due to low interest rates and speculation. By 2009, property values had tripled in many areas. However, the bubble began slowly deflating in 2011 as supply increased while demand decreased. This has impacted related industries and China's economy, which relies heavily on construction. Experts estimate a 30% drop in housing prices could lower China's GDP growth significantly. The document outlines the Chinese property system, government actions, and strategies for investors going forward.
2. Some Background
China’s Population: 1,355,692,544
➢ China’s real estate bubble began developing around 2005 due to
very low interest rates and speculation.
➢ Between 2005-2009, property values had tripled in several parts of
the country.
➢ Members of the middle-class couldn’t afford to purchase these high
priced homes in popular cities, therefore several “ghost cities”
appeared with vacant buildings.
➢ To maintain high GDP growth, the Chinese govt. continued to
overinvest in massive infrastructure projects meant for real estate
development.
➢ In 2011 the bubble began to slowly deflate.
3. The Current Situation
➢ China’s economy is vulnerable
because property investment
accounts for anywhere from
16 percent to 20 percent of
GDP and it is dropping at a
fast rate.
➢ There is too much supply,
while demand is low.
➢ Prices continue to go down.
➢ The current downturn in the
real estate market is effecting
related products such as steel,
wood, appliances, furniture,
etc.
4. Property Law of the People’s Republic
of China
➢ Land is owned by the government
➢ 3 categories of land
○ 1) state (government) - urban
○ 2) collective - rural and suburban
○ 3) private - residential, industrial, educational, commercial,
scientific, etc.
Note: private in terms of being able to lease land, which belongs
to government
5. Lease Terms
➢ After rental period is up, land is on the market.
➢ Land is transferable during lease, but is subject to a fee.
➢ Land for agricultural purposes can’t be converted for other use.
6. Government Action
Rural
1) Cash for loss of land
2) Resettlement subsidy
3) Compensation for structures and
crops
Urban
Takeover for public interest, renovation
of old towns, expiration of land
contracts without renewal, end of use
for public infrastructure
“Appropriate compensation” for loss of
private property with cash and moving
expense costs, or replacement structure
Leaseholder can petition with land
administration department
-Possibility of lawsuit against
government
7. Regulations
➢ Foreigners are discouraged from buying homes due to hurdles
○ ex) must live in region for X number of years, have paid social
security taxes for X years, have to be married, etc.
➢ Big cities such as Beijing, Shanghai, Shenzhen, and Guangzhou
limit residents to 2 homes and nonresidents to 1.
○ Purchase of second home is made difficult with harder to
obtain bank loans, higher interest rates, and more than usual
30% downpayment
8. Comparison
In most years, China
and US have the same
trend. However, in
2008 and 2009,
Chinese real estate
price rise up quickly.
9. The increase of price is not
unreasonable. The
population increase
rapidly. It indicates that
the demand continuingly
increases.
10. In US, real estate change with GDP and disposable personal income.
However, China is different. Real estate price has its own trend and its
growth rate fluctuates a lot. Actually, it is affected more by regulation.
11. Impact on Economy
➢ If China’s housing prices were to fall by 30 percent, it would
have knock-on effects across the economy, causing a “severe
downturn” in construction and steel production.
➢ Investment in rail and public utilities would also fall
substantially “as the slower growth of cities and fewer land
sales would cause local governments to delay infrastructure
investments.
➢ China’s GDP would slow dramatically, to 4 percent annual
growth, down from 7.7 percent last year; that would give
China’s economy its weakest performance in 24 years.
14. Investor’s Reaction On Housing
• Even though construction companies
are slowing down on constructions,
inventory is still rising high.
• China’s GDP growth in last
decade was fueled heavily by
constructions and infrastructure.
• “We are definitely more cautious about
buying land this year” - Yang Duo
• With this rate, we can see that
real-estate bubble is deflating.
15. Estimation of China’s Future GDP
• 10.5% (2010) 9.3% (2011)
Estimation surveyed by
China National Bureau of Statistics
17. Government’s Confidence
• China is making corrections
• The China Household Survey
indicates 30% price drop would
only cause 3% of households to
go underwater.
• The blue line and the green line
is the cyclical pattern of bubble,
but red line (Chinese property
priceline) is not fitting in to typical
pattern.
18. Investment Strategies
➢ You have to be patient and mindful.
➢ Don't panic, will not be as bad as the U.S real estate crash.
➢ Different outlooks for the short run and long run.
➢ Recently housing starts decreased by 22% compared to the previous
year.
➢ Related industries will fall.
➢ In the short run, you might want to short sell stocks in the
construction and raw materials industries.
19. Long run
➢ Bank regulations should prevent bad loans.
➢ Less people will default on loans.
➢ Tougher anti corruption movements.
➢ Transactions and investments should be more secure.
➢ Since we expect the burst to be smaller than the U.S one supply and
demand will meet much faster.