February 26, 2006

Shanghai's hot housing market has fizzled after a run-up fed by speculators, threatening a significant part of China's economy.

Thought we'd go around the world for a bit and peek in on collapsing real estate markets. First up... Shanghai! A bubble is a bubble is a bubble. Just change the names... Phoenix for Shanghai

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

For the first time, homeowners here 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 home buyers are suing to get their money back.

Banks are fretting about a wave of default loans."The entire industry is scaling back," said Mu Wijie, a regional manager at Century 21 China, who estimated that 3,000 brokerage offices had 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, says Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong.

Although the city's 20 million residents represent less than 2% of China's population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20% of the country's property value. About 1 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 also was 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.


Anonymous said...

Western countries have established laws for handling foreclosure and reposession. It's messy and convoluted some times, but the legal framework is there and has functioned for a couple hundred years.

China will face growing pains in this area, and I think it will take longer to clean up.

Satya said...

What has surprised me is the length of time the boom lasted.

The serious risk is that the Zhongnanhai leadership will come to believe the Western economists who keep up the mantra that more and faster liberalization is the only path to further economic growth. The one factor keeping China from experiencing the serious side of the business cycle (a real decline in growth) is that the Chinese government (central, provincial, and local) has moved so slowly to withdraw from its position as direct or indirect controller of cash flows in industrial enterprises. Thus, unemployment has risen slower than it might have under a more "big bang" liberalization regime (think Russia and Poland, for instance). Under the current approach, the housing markets can deflate without pulling the entire economy down with it because the government continues to have the wherewithal to manage aggregate demand and investment. But this may change because President Hu and company are not immune to hubris.

Anonymous said...

Think that another reason the Shanghai housing bubble will not bring down the whole country's economy is because China's whole economy is not dependent on ever-escalating RE prices (as it seems to be here in the States).

They actually have some other things going on over there besides selling RE to each other.

You know, things like building infrastructure, manufacturing, producing goods, etc.