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Encyclopedia > Chinese property bubble

A U-turn in real estate prices in China's biggest city has driven many buyers straight into negative equity.


Homeowners and investors wondering what follows a housing bubble can look to China's largest city. While Shanghai was once one of the hottest markets in the world, sales of homes have virtually halted in some areas of the city, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.


For the first time, homeowners are learning what it means to have an upside-down mortgage - when the value of a home falls below the amount of debt on the property.


Recent homebuyers are suing to get their money back. And banks are fretting about a wave of default loans.


The entire industry is scaling back and an estimated 3,000 brokerage offices have closed since spring. Real estate agents, whose phones wouldn't stop ringing a year ago, say their incomes have plunged by two-thirds.


Shanghai's housing slump is only going to worsen and imperil a significant part of the Chinese economy according to Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong.


Although the city's 20 million residents represent less than 2 per cent of China's population of 1.3 billion, Xie said Shanghai accounts for an astounding 20 per cent of the country's property value.


About one million homes in Shanghai alone - about half the number of housing starts for the entire United States in 2004 - are under construction.


"They'll remain empty for years," Xie said, adding that a jolting comedown was also in store for other Chinese cities with building booms - including Beijing, Chongqing and Chengdu - though other analysts say the problem is largely confined to Shanghai.


Shanghai's housing bust comes after a doubling of prices in the previous three years, a run-up fuelled by massive speculation. With China's economy booming and Shanghai at the centre of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up.


At least 30 per cent to 40 per cent of homes sold were bought by speculators and ordinary people had no option but to follow the trend. Worrying that prices would be even more unaffordable tomorrow, many of them borrowed from relatives and banks to buy as soon as possible.


The Shanghai government only pushed the market higher and many of the officials said Shanghai's property market was healthy and wouldn't drop before the World Expo in 2010.


For Wang Suxian, the tale of two lines illustrates how the bubble has burst. When home prices were at the tail-end of the boom in March 2005, Wang hired two migrant workers to queue up in a line for a chance to buy units in a development described as being modelled after an apartment community on New York's Park Avenue.


The workers waited 72 hours, including cold nights, but 35-year-old Wang was thrilled to come away with two apartments - one for $110,000 (€92,000), about the average price for a new home in Shanghai, and another for $170,000. They were among Wang's four investment properties.


And for a short period, Wang believed she was raking in hundreds of dollars a day for doing nothing, as property prices in the city kept soaring.


But today, prices at the complex have fallen by one-third, and the lines of frenzied buyers are gone. Wang is among dozens who are fighting the developer to take the apartments back.


On a recent morning, she stood in a line herself with about 40 other buyers, outside the builder's headquarters, demanding that they negotiate a deal to return their money. "This is ridiculous," Wang huffed.


The company, Da Hua Group, invited Wang and other homeowners inside, served them hot tea, then told them to forget it.


It is thought that it will take at least three years before the property market becomes healthy again.


Developers say many of Shanghai's homes are valued at about $70,000 (€58,500) or less, and price drops haven't been as steep for those units.


Some still see promise in the Shanghai market. Incomes are rising and droves of people are relocating from the inner city to outlying areas, said Richard David, managing director at Macquarie Property Investment Banking China in Shanghai.


The Shanghai government which owns all the land has auctioned off few lots in the last two years, which will limit the number of housing units in the future.


But that's little solace for homeowners who have seen inventories rise even as buyers show no hurry to come back into the market.


In Shanghai, people blame the popping of the housing bubble on the central government, which has applied one measure after another in the last year to quash excessive speculation and price increases.


Banks were ordered to raise their best rate on home loans to 5.5 per cent from 5 per cent. Home buyers were required to make down-payments of at least 30 per cent, up from 20 per cent. A 5.5 per cent capital gains tax on home sellers' profits was imposed.


Beijing also levied a 5 per cent tax on the sale price of homes sold before two years of ownership. "It's killed the speculators," said David Pitcher, a Shanghai developer and former head of CB Richard Ellis's office.


Few analysts are betting on a quick turnaround. Yin Zhongli, an economist at the Chinese Academy of Social Sciences in Beijing, says a housing crash takes time to clean up. He worries that the financial sector will be crippled by the real estate fallout. Last year, he said, 76 per cent of all bank loans in Shanghai were in real estate.


Current situation

As of 2006, several areas of the world are thought by some to be in a bubble state, although the subject is highly controversial; see: 2006 is a common year starting on Sunday of the Gregorian calendar. ...

Home $weet Home: cover of the June 13, 2005 issue of Time Magazine. ... Many commentators believe that a British property bubble has been existing since about 1998 in the British property market. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... At the height of the bubble, it was a matter of pride that the land around the Imperial Palace in Tokyo was at one point worth more than California, the Financial Times said. ... The neutrality of this article is disputed. ...

References

  • Barron's, "The Bubble's New Home", June 20, 2005. See also this blog.
  • The Economist, December 8th, 2005, "Hear that hissing sound?."
  • The Economist, June 16th, 2005, "After the fall."
  • The Economist, June 16th, 2005, "In come the waves."
  • The Economist, April 20th, 2005, "Will the walls come falling down?"
  • The Economist, May 3d, 2005, "Still want to buy?"
  • The Economist, May 29th, 2003, "House of cards."
  • The Economist, May 28th, 2002, "Going through the roof."
  • The New York Times, December 25th, 2005, Take It From Japan: Bubbles Hurt.
  • Robert Kiyosaki (2000). Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money—That the Poor and Middle Class Do Not!, New York: Warner Business Books.
  • Robert Kiyosaki (2005). All Booms Bust, History in the Making, All Booms Bust: Making Myself Clear.
  • Burton R. Malkiel (2003). The Random Walk Guide to Investing: Ten Rules for Financial Success, New York: W. W. Norton and Company, Inc.
  • Burton R. Malkiel (2004). A Random Walk Down Wall Street, 8th ed., New York: W. W. Norton and Company, Inc.
  • John Allen Paulos (2003). A Mathematician Plays the Stock Market, New York: Basic Books.
  • Robert J. Shiller (2005). Irrational Exuberance, 2d ed. Princeton University Press.
  • John R. Talbott (2003). The Coming Crash in the Housing Market, New York: McGraw-Hill, Inc.
  • Andrew Tobias (2005). The Only Investment Guide You'll Ever Need (updated ed.), Harcourt Brace and Company.
  • Eric Tyson (2003). Personal Finance for Dummies, 4th ed., Foster City, CA: IDG Books.
  • Benjamin Wallace-Wells, "There goes the neighborhood", Washington Monthly, 2004 April.
  • Elizabeth Warren and Amelia Warren Tyagi (2003). The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke, New York: Basic Books.

Barrons can mean: Barrons Educational Series, a publisher of books, as well as college entrance exam preparation classes and materials, based in the US Barrons Magazine, a financial weekly published by US-based Dow Jones & Company See also: Barron This is a disambiguation page — a navigational aid... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Limited in London. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Limited in London. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Limited in London. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Limited in London. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Limited in London. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Limited in London. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... The Economist is a weekly news and international affairs publication of The Economist Newspaper Limited in London. ... For the Cusco album, see 2002 (album). ... The New York Times is a newspaper published in New York City by Arthur O. Sulzberger Jr. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... Robert Kiyosaki Robert Toru Kiyosaki (ロバート・トール・キヨサキ, 清崎 å¾¹, born April 8, 1947) is an investor, businessman, and self-help author. ... This article is about the year 2000. ... Robert Kiyosaki Robert Toru Kiyosaki (ロバート・トール・キヨサキ, 清崎 å¾¹, born April 8, 1947) is an investor, businessman, and self-help author. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... 2004 (MMIV) was a leap year starting on Thursday of the Gregorian calendar. ... John Allen Paulos is a professor of mathematics at Temple University in Philadelphia who has gained fame as a writer and speaker, usually on the topic of public ignorance about mathematics. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... Robert Shiller is a well-known economist and Stanley B. Resor Professor of Economics at Yale University. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... Andrew Tobias (born April 20, 1947) is an American journalist, author and columnist, whose main body of work is on investment, but who has also written on politics, insurance and other topics. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ... 2003 (MMIII) was a common year starting on Wednesday of the Gregorian calendar. ...

External links

  • House Price Crash UK housing market discussion website. Also contains listings of the various house price indices and economic data.
  • Inside Property UK News site dedicated to the UK housing market and property prices in the UK.
  • California’s Real Estate Bubble by Fred E. Foldvary from a libertarian perspective.
  • InvestorElite Housing Bubble Section offers several conflicting opinions on the existence of the housing bubble.
  • Real Estate Bubble reviews the raw numbers on today's home prices and supply, and opines on where the real estate market is headed.
  • The US Housing Bubble A reference page detailing the effects on the US economy when the housing bubble bursts.
  • Center for Economic and Policy Research CEPR regularly releases reports on the U.S. Housing Bubble.
  • The Bursting Bubble Collects links that are both bullish and bearish on the U.S. housing market.
  • Bubble Meter A blog about the US housing bubble

 
 

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