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Food for Thought - China's Alleged Property Bubble

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bubble_2 June 17, 2010 (Chinavestor) Some argue that the property bubble could burst "quickly" in China. Nomura Holdings said China's property bubble could burst "quickly" with real estate values tumbling by as much as 20% over the next 12 to 18 months. Sun Mingchun, a Hong Kong-based economist at Nomura told Bloomberg News prices in some Chinese markets such as Beijing and Shanghai exceed disposable income by 13 or 14 times.

Some argue that current weakness in developer stocks is actually an opportunity to buy into weakness. Shares of China Vanke Co. Ltd. (SHE:200002), the largest publicly traded Chinese real estate developer, fell 24% YTD while Poly Real Estate (SHA:600048), the largest real estate stock listed on the Shanghai Stock Exchange, lost 35% of its market cap in 2010. American listed China Housing & Land Development, Inc. (NASDAQ:CHLN) shed 37% YTD while highly liquid E-House (China) Holdings Limited (NYSE:EJ) fell 20% YTD.

China's property values surged 12.4% in May after a 12.8% jump in April, fueling speculation that Beijing's efforts to cool rising property prices are not working as desired. China has banned third-time home purchases and increased downpayment requirements for second-time home buyers.

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Source: National Bureau of Statistics of China

Morgan Stanley (NYSE:MS) contends that those efforts are working because demand remains robust in China's real estate market. On Tuesday, the China Banking Regulatory Commission warned of growing credit risks in the nation’s real-estate industry and increasing pressures of non-performing loans, according to Bloomberg News.

But again, Mark Mobius and other famous Asian investors argue that the time is right for bottom fishing.

The fact of the matter is that there is a huge underlying demand for housing that is not going to go anywhere. China has over 800 million people living in rural communities while their disposable income is on the rise. Food prices, advanced agricultural methods and yields help farmers to save and try to move into cities. The urge for urbanization is accelerating creating a demand that is hard to tame. This creates a colossal appetite for housing in cities keeping prices high.

Another aspect to housing is the lack of alternative investment. Banks pay close to zero interest while equity markets have been volatile wiping out savings of millions after the 2008 market crash.

But the good news is that the Chinese property bubble, if existed, would burst with a much smaller boom than it did in the U.S. There is no such thing as zero down-no income verification sub-prime loan in China. Interested borrowers typically pay down-payment of 30% to 50% for fixed income loans, leaving speculative investors off the equation for the most part.



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