The Chinese Real Estate Bubble
There is no question the Chinese real estate market has expanded significantly in the last twenty years in conjunction with the ascendance of the Chinese economy; however, the real estate market is now cause for concern. According to Gavekal, a global investment research firm, prices have more than doubled in the last decade due to low interest rates and a housing shortage, but now there are some signs of concern. From June 2015 through the end of 2018, the 100 City Price Index increased 31% to nearly $202/sqft, which is 38% higher than the median $/sqft in the U.S., where per capita income is more than 700% higher. This is of serious concern to both the Chinese and global economies. The Chinese real estate market is huge; ~25% of Chinese GDP comes from construction and ~80% of the country’s wealth is in domestic property holdings. That’s a combined $65 trillion.
Fitch’s projected annual Chinese GDP growth of 5.8% from 2019 – 2022 is one of the lowest for China in recent years, primarily due to stricter regulation of shadow financing and U.S.-China trade tensions. The implications for long-term investment are significant for both real estate and the economy in general. Domestic real estate investment has decreased in response and resulted in the insolvency of some firms. That being said, Chinese real estate firms remain highly levered.
In response to the slowing economy, the Chinese government has primarily focused on deleveraging, driving investment in manufacturing, particularly high-tech manufacturing, devaluing its currency, and stricter regulation of shadow financing. In addition, the government has lowered taxes and loosened monetary policy to boost spending and investment in the medium-term. Foreign investment has also increased in the real estate market. As domestic firms decrease investment, well-capitalized foreign firms will step in to acquire cheap, prime properties without the same level of competition. This foreign investment should moderate some of the negative impacts of the relative decline of domestic firms.
In the opinion of many economists, the Chinese real estate bubble is real. The real question is – what will become of it? Personally, I believe the Chinese government maintains sufficient control over the economy in the short-to-medium term to prevent a meltdown of the real estate market; however, in the long-term, market economic realities must prevail. Hopefully, the Chinese government will moderate its response over time, bringing its policies more in-line with the free market at a moderate pace (a step approach) to lessen the impact, and prevent a global economic crisis.