There have been a lot of recent speculations in Western media about the inevitable collapse of Chinese real estate investment market causing the entire economy to crash, and, in turn, pulling the world economy into new recession. The parallels are being drawn with what have caused the most recent global financial crisis, namely US mortgage market collapse.
In my view, these predictions are highly exaggerated and it is unlikely that A -- the real estate market in China collapses, and B -- that any troubles in this market will have any substantial effect on Chinese economy. There are several reasons to this view: first, there are no equivalents to US-type subprime mortgages in China and the banks' lending is, and has always been, fairly conservative. Home buyers still have to come up with 30-40% down payment on their first purchase and those rules are still being gradually tightened. This means that even a significant price drop poses little threat to well capitalized Chinese banks.
Since April 2010, lenders in big cities such as Shanghai and Shenzhen have adopted new rules: the second mortgages are only available with the minimum 50% down while buyers of third properties, clearly the investor category, can't get mortgages at all. These measures will certainly help "deflating" the real estate bubble other than bursting it.
There are no signs of any significant price yet drop but it is clear now that the prices will eventually fall in the next few months. Considering the fact that real estate prices have climbed by about 40% (or more for some areas) since the beginning of 2009, it only makes sense. It is apparent that many construction sites have simply been abandoned as developers failed to sell enough apartments to finance continuing construction. In Shenzhen, where I live, this is quite a depressing view -- many of those abandoned buildings stand in central areas, popular with wealthy residents and businesses which are, understandably, quite unhappy about it. If the construction will not resume in the next few months, after being exposed to the elements, those buildings will have to be demolished. I can only imagine how many people will be losing their investments this way...
Looking at what is going on in the real estate market, those investors whose apartments are still under construction must have many sleepless nights. There are huge areas under development in Shenzhen and it seems quite unlikely that thousands of those new units can be quickly populated once completed.
I'm going to update this blog with any more news on the real estate market in China but what is clear now is that it's a bad time for real estate investing, however there is still very little chance of larger fallout that may affect Chinese economy at large in any significant way.
