The real estate market in China is red hot and prices in major cities increased 50-100% in 2009. There are many experts outside China think the housing market is in a bubble and the pop of the bubble will be painful and drastic. On the other hand, when I talked to people in China, no one believes that the housing prices will drop. Who is right?
First let's look at the negatives: 1. housing price and income ration is in 20s in major cities, compare to 5 in U.S. 2. There is no economic case for investment property because return from rents is less than 3% on average. 3. Speculations are ramped. There are over 15% empty houses in Shanghai and Beijing.
Now the positives: 1. rapid urbanization. The population in big cities are increasing rapidly. 2. Central bank's loose monetary policy is still intact. 3. There are very few investment opportunities in China which force both individuals and companies to invest in real estate market. 4. Expectation on RMB appreciation has moved oversea capital into Chinese real estate market and it continues.
My analysis is that there is a bubble in real estate market but the question is when it is going to burst. It really depends on interest rate and taxes. If interest rates move up 200 bps, watch out. Taxes is being considered but probably 2 years away.
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