Friday, 13 December 2013

China's housing market - the big bubble.

Liu Li-Gang, ranked as China's number 1 economist has called it a bubble. So has Wang Shi, the Chairman of the largest residential property firm, China Vanke. Yet the hopeful bullish seem to think that China's housing prices can increase without faltering. As multitude of rural dwellers emigrate to the cities, the largest urbanisation in history has created a conspicuous demand for housing in the urban centres of the country. To keep pace with the hordes moving in, there is a colossal increase in housing projects across major Chinese cities.

In September 2013, housing prices in Beijing jumped by 18 percent compared to the same period in 2012 according to data provided by the National Bureau of Statistics. In Shanghai, the rate was 14 percent. An overview of this would give an optimistic picture… and why shouldn't it? At this rate, the housing prices may go even higher. Despite the promising figures, industry players are already calling this insatiable growth a bubble.

On the flipside, however, it seems that entire neighbourhoods and portions of cities has houses and apartment blocks proliferating but only in vain. The phenomena of "ghost towns" has now become prevalent in China. Traditionally, ghost towns are former settlements which are no longer in use now, for example, communities surrounding Soviet coal mining towns which are now completely abandoned. Mind boggling as it may be, there are "cities" in China built to accommodate millions only to find a handful of people living there. The names Ordos, Tianducheng, and Thames Town in Songjian District come to mind.

This excess of capacity, also known as overinvestment, is taking the shape of a bubble - albeit a controllable one, labelled by Wang Jianlin. The Chairman of Dalian Wanda Group announced at the World Economic Forum in Davos 2013, that the group will not rule out on acquiring hotel management firms so as to diversify investments out of Mainland China. By 2020, it hopes to have a $100 billion revenue with 20% of income coming from overseas markets.

After investing in other countries in the Southeast Asia and the US, China Vanke also wants a fifth of its revenues from overseas as well.

In similar vision, R&F Properties, Guangzhou’s one of the largest real estate companies has made plans for its first acquisitions abroad in Malaysia. Its plans are to build residential as well as commercial properties there for $1.4 billion. The Chairman commented “R&F has been exploring opportunities to tap into fast-developing markets overseas to boost its longer-term profitability.”

Chinese magnates are securing long measures by taking early measure. The questions remains - when will the bubble burst? Liu Li-Gang claims that China is facing an increasing risk of a property bubble. “But certainly within the next ten years, we're going to see another real estate bubble burst,” the former head of Bank of Boston said at a panel discussion about investment in China and the US. Few even argue this process has already started.

What is for sure now is that housing prices will keep on increasing for the time being, as the trend of investing in housing, in China, is prevalent over other forms of stowing money away safely.

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