China’s Property Bubble?

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Image by Daniel Morris via Flickr

James Chanos, the founder of hedge fund Kynikos Associates and the man who predicted the fall of Enron, is a very vocal bear on China’s property market. In April, 2010, Chanos was quoted as saying that China is “on a treadmill to hell…. is Dubai times 1000. They can’t afford to get off this heroin of property development. It is the only thing keeping the economic growth numbers growing.” A year later, Chanos is still waiting for China’s “property bubble” to burst.

Although his prediction has not yet materialized, Chanos nonetheless raises a topic that is on everyone’s mind. Questions regarding the state of China’s property market are probably the most frequently asked about the country these days. So, what is the real story?

I have my own theories, and like Fan Gang, the Director of the National Institute of Economic Research in Beijing, I believe that outside observers like Chanos underestimate the efforts of the government to avoid a bubble, but I am always interested to hear other opinions.

Therefore, I was interested to read a recent report by the Economist Intelligence Unit (EIU) that they sent along to get my thoughts. “Building Rome in a day: the sustainability of China’s housing boom” is part of the EIU’s Access China series and one of the most thoughtful reports that I have read on the subject.

For those MTD readers who are not familiar with the organization, EIU was founded in 1946 as an in-house research unit for The Economist, one of the worlds’s most respected business publications. Operating as an independent unit, EIU now delivers business intelligence and advice to over 1.5 million decision-makers from the world’s leading companies, financial institutions, governments and universities.

Relying on EIU’s in-house predictions for population and incomes in China’s cities, “Building Rome in a day” concludes that “despite rapid growth in house prices in China, the real estate market is not a bubble about to collapse. The government’s tightening measures directed at the property market will, at worst, lead to a short-lived downturn.”

The EIU’s income and population models for China’s cities point to “strong underlying demand for housing throughout the next decade.” Between 2011 and 2020, they predict that China’s urban population will increase by 26.1 percent, or over 160 million people, and that urban per head disposable incomes will increase by 2.6-fold to RMB 51,310 (about US$7,500 at current exchange rates).

According to the EIU report, continued strong demand in China’s housing sector over the coming decade will lead, directly or indirectly, to almost 40 percent growth in demand for steel and similar growth in energy demand. Though the report does not forecast housing prices, it concludes that “real estate assets in renminbi are likely to be one of the best-performing global asset classes over the next decade.”

Although EIU’s China Access series is generally available only by subscription, MTD readers can read this particular report by downloading it here. It’s well worth reading.

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