Is there a real estate bubble in China? Mr. Bob Davis of the Wall Street Journal thinks there is, and according to him, it is going to burst very soon
“The Chinese real estate market has been inflating for years, growing at a rate of 10% a year. Most recently, it has been declining and it is probably going to fall by 10% this year” – This is the main conclusion of Mr. Bob Davis from the Wall Street Journal; Mr. Davis believes we are witnessing the beginning of the decline of the Chinese real estate market and perhaps of the entire Chinese economy.
In a post published just a month ago on Laowaiblog titled “China’s Ghost Cities“, we reported that there are more than 64 million empty apartments in China and that 10 new cities are being built in China every year. Could it be that the China Real Estate Bubble is beginning to burst?
Watch: Mr. Bob Davis from WSJ discusses China Real Estate Bubble
Mr. Davis states two reasons for why apartment prices have been rising for so long in China: “prices have gone up for so long in China for two reasons: the first of which is that Chinese savers really do not have many alternatives. They can’t invest abroad, the stock market is seen as weak and so they invest in real estate no matter whether there is actual demand for it or not. The second reason is that people are looking for better returns (on their money). Virtually, the only thing that they can do with their money now is to put it in the bank, and they get deposit rates that are well below inflation; The reason that they are well below inflation is because the state keeps interest rates very low as a way to aid state owned banks and state owned corporations. The system is actually pushing real estate prices upward.”
Is China Real Estate Bubble about to Burst?
“The concern is that China’s real estate bubble will continue to inflate for another year, two, three, who knows how long, and then burst. So then what would happen? China’s real estate market is connected to the steel industry, the construction industry and many others, so a downturn would be bad. But it could be really bad, in the level of the United States or Japan, if there were a lot of loans that were behind these real estate purchases. Nobody knows whether that is the case in China, But one indication is that many state owned companies bought real estate using a lot of leverage and when that happens, if real estate prices go down, the state owned companies have problems, the banks have problems and the whole thing is coming to a halt. In the same way, the U.S system has come to a halt because of the real estate problem here, and the Japanese economy faced the same problems.”