Last month, China’s richest man, advised young people hoping to become rich to set a “small target” of 100 million RMB, he probably should have added that they should stay out of Chinese real estate as well.
On Wednesday, in an exclusive interview with CNNMoney, Wang Jianlin said that China’s treasured real estate market is spiraling out of control. The billionaire owner of the Dalian Wanda Group, China’s largest real estate developer, stressed that the “biggest bubble in history” is the product of a disparity in housing prices between top-tier cities and lower-tier cities across the country. Increased demand for housing, fueled by the overwhelming migration of people from rural areas to urbanized ones, has created sky-high real estate prices in China’s top cities. For example, this August in Shanghai, housing prices were 31.2% higher than they were last year, according to Business Insider. And we thought our landlord had just made a mistake with last month’s rent.
The phrase “housing bubble” is a highly provocative one, considering the incredible damage to the world done by the US housing bubble in 2008, but Wang’s doomsday projections carry weight. With a net worth of $32.1 billion, made mostly in the real estate sector, we can only assume that he has some idea of what he’s talking about. Recently, Wang has focused his efforts more and more on the entertainment sector, buying up Hollywood studios and building domestic theme parks, pulling away from the commercial real estate ventures that made him rich. Additionally, many experts, analysts and people with eyes agree with Wang’s assessment that there are some serious problems with China’s housing sector.
The first problem: migration from rural areas to large cities has become a big factor in soaring housing prices. For the most part, opportunities and wealth in China are locked up in its ultra-modern urban centers. Those living in the countryside can’t get in on China’s massive accumulation of wealth unless they move away from their homes and find work in the cities. Real estate supply cannot keep up with rapidly rising demand, pushing up the prices of homes. And while more and more migrants move to top-tier cities, very few of them ever return back home. A study published yesterday found that while 80% of migrants to Beijing say that they would like to leave the capital someday; over the past 20 years, only 28% have done so.
The second problem: The housing bubble. As reported by Forbes, during periods of unstable increases in housing prices, the government has intervened and restricted home sales, encouraged large down payments on property, and even punished property agents for trying to hype up the market. Meanwhile, in times of relatively low housing prices, the government has relaxed these tight controls, leading to risky lending. Since last year, there has been a 30% increase in outstanding mortgages. This kind of behavior has also given rise to a supposed “shadow economy,” which buys up outstanding debt and then repackages and resells it. Why does that sound so familiar?
The third problem: even though there is a dramatic lack of confidence in the real estate market, consumers are still trying to purchase homes. A survey by the People’s Bank of China found that 53.7% of respondents thought that China’s real estate prices are “high and hard to accept,” according Business Insider. Less than half of those surveyed found prices to be “acceptable,” while 23% expected prices to rise next quarter, against 11.9% who thought they would fall. Given these statistics, it’s hard to believe that housing sales are up 38% from last year.
Well, at least over two-thirds of Chinese wealth isn’t tied up in property… oh wait! As reported by Bloomberg, Chinese homeowners have come to see near double-digit real-estate returns as a birthright. According to one study, more than 70% of Chinese household wealth is in real estate. This all could go a long way to explaining this viral video of a new real estate opening in Hangzhou that generated a lot of discussion on Chinese social media this week:
And it could also help to explain why couples lined up to get divorced on Monday in Nanjing, so that they could exploit the city’s new property buying restrictions on households.
We could go on…
— Chris Buckley 储百亮 (@ChuBailiang) September 29, 2016
Just this week, a Chinese firm purchased a building located in downtown Sydney for the auspicious sum of $88,888,888 AUD. Coincidence? Again, no. More and more Chinese investors are diversifying their property holdings by buying real estate in more “stable” economies.
So, is this the end of the world as we know it? No, is probably the simple answer. The fact is that China’s economy remains quasi state-controlled, and it is very unlikely that the government will allow the market to suffer much. In his interview with CNN, Wang went on to explain how China’s real estate market hasn’t yet “bottomed out,” which would open up policy options for local governments. Since 2005, analysts have been speculating that China’s housing bubble will pop. A decade later and nothing like that has happened, this goes some way to show the resilience of the system that Beijing has put into place. Increases in housing prices are also not quite at the level they were at in 2014. So, it looks like there is still hope yet.
Of course, if the bubble does burst, China still has Wang’s son and his 2.5 million RMB nights at the KTV to help the Chinese economy recover.
By Seamus Gibson
[Video via CNNMoney]