The Beijing Bubble

What’s happening with real estate around Beijing?

The week of August 8 was a perilous one for the US; the last-second debt deal and subsequent crash, rebound and second crash of the stock market threw Americans for quite a loop. All the while, China was exporting at record levels and chastising America for fiscal recklessness. I suppose that when you’re riding high on your exponential growth and developing middle class it’s hard not to look at others crumbling around you and find plenty of room for criticism.

There is an intense construction boom in China as major cities like Beijing rapidly move outward. Peasants are paid to relocate and make space for apartment buildings, condominiums, and high rises. Construction of urban residential real estate is growing at 25 percent a year, funded largely by local governments borrowing money from Chinese banks.

The wealth line is certainly rising in China. Credit Suisse has estimated that 30% of the Chinese population possess wealth between $10,000 and $100,000. Millionaires and billionaires are an increasing demographic and many of them are plying their wealth to invest in urban real estate. This movement is accelerated by the steep rises in the price of new properties – as much as 20% in two years – and sees the emerging Chinese middle class snatching up second or third properties as investments while the price is comparatively low.

The result in all this prosperity is a landscape of freshly built uninhabited property. China is counting on continued growth in the long term to grow the population’s wealth, which would lead to the purchase and development of those phantom properties. When that begins to happen, China will start to see a return on the investment.

This scene should sound familiar. Perhaps like the construction boom in Texas that ultimately led to the Savings & Loan crisis. Or maybe the boom in Spain that eventually brought the Spanish economy to its knees in 2007. China is building ahead based on long-term economic forecasts that factor in their current surging exports and growth. The problem is that this model has failed in the past. Multiple times for different countries.

China is taking steps to stymie the inflation around the housing boom, mandating high percentage cash down on properties – 20% for small single family homes and as much as 50% for second homes. The problem still remains that in Beijing, housing prices are at least 20 times the average income of city residents. The growth rate is astronomical, and though wealth is growing, there are not enough people buying these new properties. The real estate bubble in Beijing seems like it could burst at any time and then it will be time to see if China can keep the economy under control with the measures they’ve put in place over the past two years or if Chinese prosperity ultimately results in economic collapse.

Volatility in Asian real-estate markets is rising just as real-estate markets in the US are stabilizing. A brisk new movement of properties is beginning in America from lofts in downtown Chicago to Panama City Beach condos. As America’s economic ties with China continue to tighten, the outcome of each respective housing drama will play a significant role in the future economic prosperity of each nation.