Shanghai Real Estate: Bubble or Boom

Shanghai, and China as a whole, is in the midst of a major real estate boom, there’s no question about it. Due to this, many are considering purchasing property in the Shanghai area, but before you get your expatriate health insurance and follow suit you should take caution. There are those speculating whether this boom will lead to a bubble as many say the signs of which are already evident. So what exactly is the Shanghai real estate forecast: continued boom or bubble?

For many, the outlook for the housing market looks rather grim. Moody’s Investors Service even downgraded China’s property sector from “stable” to “negative” recently on concerns that rising interest rates and reduced bank lending would weaken credit conditions and diminish demand. The report also said that reduced bank lending, increased property supply, and rising interest rates would inevitably bring down profit margins and sales while, at the same time, weaken the balance sheet liquidity for some developers. According to the Moody’s report, the government’s priorities of maintaining social stability by controlling inflation and containing any possible bubble will continue to influence the direction of the property market.

However, a recent study by the Economic Intelligence Unit (EIU) predicts a different forecast. Although soaring housing prices in the country (figures show that property sales in China jumped 75 percent last year) have many pointing to a bubble which could cause major repercussions around the globe, the EIU report reached some more optimistic conclusions:

“China is not facing a major housing bubble, although there could be a short-term mild correction. The Economist Intelligence Unit’s new models of population and incomes in China’s cities point to strong underlying demand for housing throughout the next decade. They indicate that housing demand in China is growing so quickly that a correction in the next couple of years will be short-lived.”

Although the report agrees that the nation does have a high level of per-head floor space due to its income levels, it does not believe that this will lead to a collapse of demand for housing. The EIU report agrees that “China’s love affair with housing is driven by cultural factors linked to the gender imbalance, and relatively light taxation of housing as an investment. Neither of these factors is likely to change significantly this decade.”

Judging from the numerous deals being done recently by some of the world’s most sophisticated global investors, clearly not everyone believes the boom has reached its peak quite yet. One particular investor recently bought 54 apartments in a single day and others are spending millions for high-end property in the heart of Shanghai.

So is this property boom that we’ve witnessed in Shanghai recently going to last? As the debate rages, it’s clear that no one can agree on one single forecast for the city’s future. Purchasing real estate in Shanghai could be the right thing to do right now but, as most real estate investors will acknowledge, almost anything can happen in China’s volatile market.