Build a hotel in 6 days! China’s housing bubble?

This week The Economist had a good article on the Chinese housing market. It seems that the biggest concern is the massive increase in the potential supply of housing. Barclays Capital have indicated that 40% of the skyscrapers due for completion in the next 6 years will be in China, increasing the number of tall buildings in Chinese cities by more than half. To give you an idea of the speed that the Chinese work at, a 15 storey prefabricated hotel in Changsha was erected in just 6 days – see below.

Within China incomes have mirrored increases in house prices (interesting to note Australia and New Zealand on this graph) but in the bigger cities this has not been the case and the recent IMF report suggested that “city prices appear to be increasingly disconnected from fundamentals”. In order to put try and quell house prices the Chinese government have done the following:
* first homebuyers need a 30% deposit as a downpayment
* if you buy a third or subsequent home you will not be able to get a mortgage.

With all this supply you need to have demand which in most countries often comes in the form of speculative investors looking for a capital gain. The government has been trying to restrict this practice by the following:
* restricting mortgages taken out for investment purposes
* banning state owned enterprises from buying land
* banks have to put money into an account that is held by a third party and is only released at certain milestones – known as escrow accounts
* for developers downpayments are now 60-70% of the land’s value

However this has led some developers to borrow money from offshore and restrictions or rules are open to corruption especially in the smaller cities.

Nevertheless, these efforts by the government have had some success with house inflation running at 6.4% – the CPI in China rose 4.9 percent year on year in January 2011. And its exposure to mortgages and loans are not at the levels seen in developed countries. According to the IMF, mortgages accounted for 20% of outstanding loans in Chinese banks. This is compared with 52% in Hong Kong and 57% in the USA. But The Economist argues that mortgage debt is rising from a low base; and a property bust could spillover into other fields to which banks have lots of exposure.

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