China’s Success Rides on Real Estate Bubble
Making the case that China is now in bubble mode doesn’t seem as ridiculous as it might prior to the global recession. In fact, I have been long Chinese stocks for years, mostly due to the huge export driven inflows of cash. However, as China’s economy becomes more consumptuous, particularly in real estate, it appears the country may be entering what may be difficult to exit—a huge real estate bubble.
Property Market Boom
The growth in the real estate market in China cannot be understated. Housing prices, especially in metro areas, are seeing the biggest surge in prices. Currently, housing prices in Shanghai and Beijing have exploded 30 and 80% faster respectively, the change in household earnings. This is startling, and shows that housing prices are quickly running away from affordability. All told, prices have doubled in just three years.
Lending Surges
The key to any asset bubble is the access to cheap credit. China’s real estate bubble is no different with rates at their lowest in decades and total borrowing up over 30%. In fact, credit now makes up 40% of China’s gross domestic product. In 2007, US borrowing hit 80%, so China’s problem may be much smaller, albeit just as important, as the US real estate blow up. Luckily, Chinese banking assets are only comprised 20% of home loans, giving them some breathing room should the real estate economy reverse.
Employment
Its not all entirely dim. China’s surging real estate economy has created millions of construction jobs. This, unfortunately, could emerge as another negative. Should the construction industry cool, millions of jobs are going to be lost, and ultimately, defaults on home loans should soon follow.
Where We Go from Here
China has already made some progress to wind down the real estate economy by limiting new speculation. To buy a second home requires a down payment of 40%, 13x higher than federal limits at the height of the US real estate bubble. Also, real estate in rural areas of China are hardly rising, which suggests the problem may just be local. However, as we saw in 1992, even the most local of bubbles have huge, lasting effects.
The real estate price in China is outrageous. In Shanghai for example, an average two bedroom apartment costs more than $300K. The price raised 50-100% just in 2009.
How would you go about investing in the collapse of the Chinese economy?
Chinese Real Estate ETF : TAO
China “25″ Index Fund : FXI
Short or buy puts on either of these names.