MAKING SENSE -- October 14, 2011 at 11:26 AM ET
Chinese Housing Bubble: A Troubling Update from Beijing
In this latest dispatch from China, stand-up economist Yoram Bauman explores the possibility of a Beijing housing bubble. We first reported on this threat in our "China on the Rise" series back in 2005, when MIT economist and FOM$* Yasheng Huang raised the red flag of real estate speculation.
YASHENG HUANG: By my reckoning, a lot of these investments in China are not justified by the returns.
PAUL SOLMAN: Yeah, but given the huge migration of people from the country to the city, 20 million a year or something like that, all those migrants, they have to live somewhere.
YASHENG HUANG: But Paul, Paul, a lot of these luxury housing is not for economic migrants, poor farmers from Gansu Province; I mean, if you go to China, a lot of these housing properties are luxurious, they are for making money.
NARRATION: But many, says Huang, are not making money.
YASHENG HUANG: In Beijing, there's a surplus of luxury properties. In Shanghai the property prices have declined by about 40 percent this year mainly on the luxury segment of the market.
PAUL SOLMAN: I mean, are the buildings going to be empty?
YASHENG HUANG: Many of them are empty now.
CHINESE ECONOMIST CHUN CHANG IN BEIJING: A housing bubble would be a big deal. It could cause more like an international crisis.
PAUL SOLMAN: Chang says the crisis of overinvestment in housing could lead to an exodus of foreign investors.
CHUN CHANG: They go out and then that will cause a lot of problems in China, unemployment as well as other problems.
NARRATOR (which is to say, me): So the question is: Will China's investments pay off or won't they?
That was the question back in 2005: Was China's famous GDP growth rate of 10 percent a year fueled significantly by construction that would never be worth the money spent on it.
No crash six years ago. In the meantime, China just kept building more housing, and is building still. In this context, Yoram Bauman's latest images of empty Chinese apartment buildings reminiscent of Spain, Ireland, and California seem ominous indeed.
In this video post, Bauman also includes one piece of what we like to call anecdata. Practicing his Mandarin Chinese (fun to watch) with Han Jing, a Beijing realtor, Bauman learns that she bought her own apartment for the equivalent of $80,000 five years ago. It's now worth $400,000, she says. Yet she can only rent it for the equivalent of $600 a month. That represents a price-to-rent ratio of almost 60:1. In the United States, by contrast, the city with the highest price:rent ratio at the moment is New York at 31:1, according to Trulia, the online real estate firm. San Francisco is fourth highest at 21:1. At the other end of the spectrum are Phoenix, 8:1, and Miami, 6:1.
Bauman's conclusion? Beijing prices and its glut of vacant apartment buildings seem as fishy as the mechanics of the hot water heater in his apartment. Wait til you see how it's hooked up.
*-Friend of Making Sen$e