Vegas
12-28-2010, 01:27 PM
http://online.wsj.com/article/SB10001424052970204527804576043580256245602.html?m od=WSJ_Opinion_LEADTop
Last week I sold an apartment in Beijing for more than 2.5 times what I paid for it five years and three months ago. When I asked the buyer why he was optimistic about real estate, he explained that land was limited in Chinese cities and government policies would keep the market going up.
So far that argument has proven right. Understanding government policy has long been the key to making money in China's property and stock markets. The atmosphere at the Beijing tax and land bureaus brought to mind California during the gold rush.
It's impossible to say definitively that a market has strayed into bubble territory until after the collapse. But prices rising out of the reach of average buyers is one indicator. Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.
If the froth is confined to housing, as it was more or less in the U.S., China can muddle through. But it is not. Consider the problem of leverage.
Those who doubt that Chinese housing is in a bubble often point to the lack of leverage. And it's true that on paper Chinese banks only lend a prudent amount to buyers, so that if the market falls by a third, they will still be "above water."
Many buyers, such as the one who bought my apartment, pay in cash. Even given the probability that banks sometimes break the rules, it's clear that leverage as traditionally understood doesn't drive Chinese home sales. But there is still plenty to be worried about, because the leverage comes from elsewhere.
Real estate is just the preferred way to store wealth. There are no property taxes, so an empty apartment doesn't cost a lot to maintain. Registered in the name of a family member, it also doesn't attract a lot of attention from the authorities who try to track down income, not all of it legal, that is not reported for tax purposes.
Last week I sold an apartment in Beijing for more than 2.5 times what I paid for it five years and three months ago. When I asked the buyer why he was optimistic about real estate, he explained that land was limited in Chinese cities and government policies would keep the market going up.
So far that argument has proven right. Understanding government policy has long been the key to making money in China's property and stock markets. The atmosphere at the Beijing tax and land bureaus brought to mind California during the gold rush.
It's impossible to say definitively that a market has strayed into bubble territory until after the collapse. But prices rising out of the reach of average buyers is one indicator. Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.
If the froth is confined to housing, as it was more or less in the U.S., China can muddle through. But it is not. Consider the problem of leverage.
Those who doubt that Chinese housing is in a bubble often point to the lack of leverage. And it's true that on paper Chinese banks only lend a prudent amount to buyers, so that if the market falls by a third, they will still be "above water."
Many buyers, such as the one who bought my apartment, pay in cash. Even given the probability that banks sometimes break the rules, it's clear that leverage as traditionally understood doesn't drive Chinese home sales. But there is still plenty to be worried about, because the leverage comes from elsewhere.
Real estate is just the preferred way to store wealth. There are no property taxes, so an empty apartment doesn't cost a lot to maintain. Registered in the name of a family member, it also doesn't attract a lot of attention from the authorities who try to track down income, not all of it legal, that is not reported for tax purposes.