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It’s hard to believe that just 30 years ago, China’s economy was known as ‘the sleeping giant’. An analogy which, if updated, would most correctly see our giant out of bed, into his finest lycra running shorts and pounding the streets of downtown Shanghai to the strains of ‘Wake Me Up Before You Go Go’. In other words, bright-eyed, bushy-tailed and about as far from sleepy as a swimming pool full of electric eels.
China’s GDP (per capita) now routinely posts returns around the 10 percent mark and in 2007 hit a whopping 13 percent. Growth like that over a decade reflects a 200 percent plus growth in productivity. Hardly the behaviour of a sleepy economy.
And while the lack of reliable data from the 1980s and 90s makes it difficult to be totally accurate about what has happened to Chinese property prices over the past thirty years, it’s fairly safe to say that they have ‘enjoyed’ rises closer to the 500 percent mark. (A shoebox executive apartment in central Shanghai will cost you at least US$600k today and while the same quality wouldn’t have existed in 1980, a similar sized unit would certainly not have cost more than 100k.)
But don’t beat yourself up if you didn’t manage to get a ticket on that particular sky-train...tickets weren’t exactly on general release. The Chinese government has always had a propensity for trying to control property price inflation and it routinely throws down new and ever more complicated layers of red tape to snuff out unwanted speculation, particularly from overseas.
A tactic which, by definition, has only been partially successful. Internal demand alone continues to fuel the upward curve and determined foreign investors (particularly from Chinese communities in other parts of Asia and non-mainland powerhouses like Hong Kong and Taiwan) have been adding to that trend. As one Chinese property investor I spoke to yesterday told me, “Forget the government’s so-called cooling tactics, where there’s a will there’s a way; if you know what I mean”. The ‘know what I mean’ bit being, I think, an oblique reference to the system’s vulnerability to good, old-fashioned corruption.
But, and it’s a massive but, now is definitely the time to consider stepping back from the rim of that particular volcano. To use an aeronautical analogy, if China’s property market were an airplane taking off from Sleepy Town, it is attempting to reach cruising speed on a near 90-degree trajectory. Which is fine if you happen to be shaped like an Apollo space rocket with engines to suit, but as any pilot will tell you, when it comes to ordinary airplanes, this is classic stalling territory. And while stalls don’t always end in a crash, they usually precipitate a bit of a nosedive if only to regain forward momentum.
Why, oh why, would I say this you might ask. China is by far the strongest economy in the world right now and yet its prime property prices are still less than half those of Hong Kong and Singapore. Surely there’s still plenty of room for improvement. The answer, as far as I’m concerned, lies in the yields. Always the giveaway statistic when it comes to spotting a potential bubble. Anything below 5 percent per annum signals danger and right now in even the most desirable parts of mainland China’s most prosperous cities, that figure has dipped below 3 percent for the first time. The government might be devising ever more devious ways of dousing the flames, but as the economist Ernst Schumacher once said, “Don’t feed the hungry dog of capitalism without expecting to get your hand bitten from time to time.”
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Reader Comments (9 comments)
What level can we generally consider "safe" to invest in Chinese property. Is it unwise to invest at this stage?
Statistics in China are confusing.
Their massive malinvestment are unneeded. They must have somtehing to do with their wealth.
it is funny to think that China is one or even the strongest economy in the world today but the central government is struggling to curb property prices, which have been increasing like a rocket.
home prices in China is boosting like a torpedo, but still many state land remain vacant.
Capitalism, that is.
Yeah, i know what you mean. If there's a will there's a way. But how can they truly control the prices?
The vastness of China land speaks for itself.
There Are Now Enough Vacant Properties In China To House Over Half Of America Recent statistics show that there are about 64 million apartments and houses that have remained empty during the past six months, according to Chinese media reports. On the assumption that each flat serves as a home to a typical Chinese family of three (parents and one child), the vacant properties could accommodate 200 million people, which account for more than 15% of the country’s 1.3 billion population. But instead, they remain empty. This is in part because many Chinese believe that a home is not a real home unless you own the flat. And so people prefer buying to renting, and as a result, the rental yield is relatively low. Why would so many properties be held vacant? They're seen as long-term investments, even if renters aren't available. This is due to the dearth of investment options available to most Chinese, butting up against their rapid wealth creation. They need to put your money somewhere, but the stock market is under pressure and bank interest doesn't cover inflation. So they plunk their money into a new property, just as a place to store their wealth, even if they don't intend to live in the place and can't find renters. Multiply this behavior by a few hundred million, and the result is enough vacant properties to house over half of America.