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.”
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Lior Paritzky is the Editor in Chief and Manager of Laowaiblog, an internet platform that provides opinion and views about social phenomena in modern China. Look for Lior on Twitter: Liorpari 
The prices for an average apartment in Beijing has risen by 150% for me. What was once considered expensive is not very cheap.
I don’t think there is a real estate bubble in the major cities, where people are wealthier and where there is high demand for apartments. But there could definitely be a bubble in some vacant “small” towns somewhere in China
Yezi, who are you kidding? have you seen what is going on in cities like Qingdao or Kunming? these are not Beijing or Shanghai. These are 2nd tier cities that have gotten too expensive for most people because the government is insisting on inflating the prices of the apartments. The real estate bubble in china will for sure blow up in everyone’s face soon!!
Mr. Davis does not put enough emphasis on the way the real estate market in China has grown. It is not only because people have no where to invest their money, but it is also because they were encouraged to invest in Real Estate and because of corruption. In China there are many real estate agencies that are motivated to tempt buyers into buying houses/apartments in excessive rates. These have a very strong incentive to sell apartments and to keep rising the value of the asset.
There is definitely a Real Estate bubble in China. It is only a matter of time until China’s Real Estate Bubble burst
I agree with James and Mr. Davis, with the chinese market not being as open for smaller investors to allocate their money where they please, and with minimal returns in a state bank, it leaves them few options; real estate is probably the best.
Also, note the political pressures that the party places on city mayors and leaders down the chain to meet their GDP growth quotas (10% annually). With China being on the fast-track to economic supremacy, infrastructure projects and construction, along with manufacturing are the bread and butter and a great way to create economic growth, jobs for citizens, and appease the party.
But I see a bubble
You are right A.J. I agree with you and with the rest. As a Shanghainese, I see prices rising all the time with no one or anything that is stopping them. many people cannot afford to pay for things that were, not so long time ago, very cheap. One of such things is apartments.
China Real Estate Bubble ? YES!!!
No doubt there is a bubble in the housing market in China, but I don’t see it’s going to burst in near soon. Considering China is not a free capitalist market as it claims to be , so that the communist party still holds a grip on whatever there is about to happen, it would use whatever means it has on hand to keep the bubble from bursting , as seen in the recent fall of purchases in major cities like Beijing and shanghai. But since real estate accounts for a big proportion in China’s GDP growth, when the housing market is being cooled down, the whole economy is going to cool down as well. As a result there will be job-losing and people become grumpy. What the Chinese government is doing now is try to keep a balance between a housing price bubble and economic growth miracle. While the bubble is a big part of the miracle, it’s ambivalent for china to burst the bubble
Hey Black Sugar Daddy (can’t believe I am writing this..)
If you think there is a real estate bubble in China, what makes you so sure it won’t burst soon? I disagree (or misunderstand) your words, because if there is a China real estate bubble, and if the condition is serious (which I think it is), I am very doubtful that the government will be able to maneuver between economic growth on one hand and real estate on the other
It is clear as day that the Chinese real estate bubble will burst soon. It is impossible to live in major cities in China as home prices and rents are way higher than average salaries for these cities
NO. I disagree that there is a real estate bubble in China. Chinese people are getting rich they can afford to buy new homes!
So what? that doesn’t mean that the prices reflect the real value of the market
You should watch the other post on this blog, the china ghost cities blog. It really makes you think about this whole china real estate bubble thing
http://laowaiblog.com/chinas-ghost-cities/
The question is not “if” there is a China real estate bubble but when will it burst. I think it is a matter of years, not months, but who the hell knows right
Many on this thread are positive that the real estate bubble in China will burst. I am not so sure: it lacks many of the characteristics that were prominent in the real estate crisis in the U.S such as mortgages (from my understanding it is not that easy to get a loan in China for a house) and the money that a person needs to put up for buying a house is at least 30-40% of the house worth. That makes it more viable that the prices are rising due to demand and a growing middle class than to a bubble…
but who is exactly Bob David and what are his credentials that he so strongly determines that there is a real estate bubble in China
I would offer another option to the survey: real estate bubble in china does not exist because prices are reasonable compared to the quality of life and what people get for their money
Are you blind or crazy? try to get a house in any major city in China and see what you come up with
The china real estate bubble issue is very real. In fact, it is the most serious threat to China’s future, excluding inflation perhaps, but these two issues are closely related. In my opinion, it is impossible that prices for housing will be so expensive and salaries would not pick up as well. This will surely create an imbalance. so to me the only question is when will this occur and not if, and I concur with the other respondents on this thread that it might take a few years, but the threat is very much viable
Do you really know how the real estate bubble in China was created? and how is it there? since the article fails to mention it, allow me to fill in the gap: in China, the government owns all the land, and leases it out at its discretion to make money. Buyers pay more than the market value, while the people living on the land receive less, with the surplus going to local governments. If there is a problem with the government, the courts will be of no help because the judges owe their jobs to the same local officials who depend on that money. Real estate companies therefore are composed mainly of individuals well versed in negotiating with the government but with little skill and even less interest in building housing that fulfills the needs of the average person.
Since only the government can own land, all individuals or corporations seeking to build on it have to pay fees to the authorities. In the absence of a real estate tax, these fees constitute the sole way for local governments to make money off real estate development. According to a report by Caixin magazine, they account for an average of 46 percent of all local government revenues.
With this in mind, and the fact that the average Chinese person doesn’t have other alternatives to invest (bank interest is often lower than the inflation rate) we can all understand why there is a real estate bubble in China
Great reply!
Basic economic theory, guys! think about demand and supply curve.
China’s real estate price has gone up so rapidly because speculators control the price of the housing.
If the price is too high, that means demand will go down, as you probably know, if you took basic economics class.
also, except for the wealthy people living in Beijing, Shanghai, or the other major cities, most of the other people are pretty much poor as hell. how are they going to afford expensive housing?
this is very important moment for the Chinese Government to stablize the real estate market now.
If not, then it will burst for sure!
When I see these pictures, from an impressionistic analysis, I see three Melbournes. Let’s be frank, as Kenneth Rogoff knows, this time ‘is never different’. However, I do note that Steven Roach sees enormous spare capacity – haven’t got the figures, sorry! – so that China has enormous room to grow. And this piggybacks on her population.
Bubble possibly, but Superpower – barring misfortunes – certainly..
I’m in Chongqing (ever heard of? 35 million people live in and around this city!!!). I see too many buildings build 2 or 3 years ago with still empty appartments, but if I ask why the locals say ‘yes of course, because most people buy not just one appartment but they buy 2, one to live in and the other to sell’ hmm… Then there are the ones still being build, soooo huge and big and so many in numbers. I just have a feeling that in this building people also will buy 2 and meaning nearly half will stay empty. The reason people still buy 2 appartments they still believe they are the ‘chosen one’ and IF are allowed to buy an appartment they SHOULD buy it. But today I heard that someone was not only ‘allowed’ to buy and appartment but also got a ‘free BMW’ with the appartment, so of course they bought it! Well I want to say they are naive and believe in some kind of lie and have not learned or heard of recent history in other parts of the world. So for me it is 99% sure the the bubble will break sooner or later, probably sooner, let’s say before 2015!