Market Defies Fear of Real Estate Bubble in China

A real estate bubble, fueled by bad loans and too much leverage, explains much of our stock market’s turmoil since 2008. So today’s article from The New York Times on the Chinese edition, caught my attention. Here are a few of the sound bites:

Last year, a record $560 billion of residential property was sold in China, an increase of 80 percent from the year before, according to government statistics that are widely considered reliable.

Signs of exuberance are everywhere. An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou, one of the highest prices paid for any property, anywhere.

Prices here have risen more than 150 percent since 2003, pushing the price of a typical 1,100-square-foot apartment up to $200,000, according to real estate experts. (Shanghai residents typically earn less than $5,000 a year.)

Okay, enough already. The point is clear. Trouble is brewing. And here’s why China’s real estate bubble is a problem for everyone. Of the five largest banks in the world, measured by market capitalization, three are located in China. If the bubble should burst, it will have untold effects on the worldwide economy and even the housing markets of other countries. Many real estate buyers rely on home loans (like those provided by Reali) in order to buy property.

I wonder what the world’s financial exposure is to Chinese real estate. Thankfully, other real estate markets around the world, and especially in the US have experienced a certain degree of normalization after the 2008 crisis. While actual home purchases may not have soared to previous highs, a rise in property rentals (backed by reputed tenant screening services like AAOA) has allowed owners to realize some form of return on investment.

And yet the same questions loom. What the world’s financial exposure is to Chinese real estate.With banks trading credit risk, through those insufferable Weapons of Money Destruction otherwise known as credit default swaps, Who owns the credit risk to their developments? Have they ever been to China? Or can the creditors even spell Peking? I mean Beijing.

Norb Vonnegut