New Look at why Real Estate in China may not be Overheated

There’s been ample speculation of late about the possibility of a huge bubble forming in China’s residential real estate market. Today, US Global Investors’ director of research John Derrick and senior china analyst Michael Ding argue why that may not be the case at all.

From the Frank Talk blog:

“The price of housing in China has risen as the economy has expanded, but the chart from BCA Research shows that housing price growth has been significantly slower than GDP growth since the late 1980s.

“The price of housing has roughly doubled since the late 1990s, but it’s important to remember that China’s prices have risen from a much lower base than in the developed countries (among them, Britain, Ireland and Spain) in which bubbles were created. It’s also relevant to point out that household disposable income in China more than doubled during the period. The rise of the Chinese middle class is a major global economic phenomenon – tens of millions of people are added each year.

“Leverage is also an important indicator in judging how susceptible a housing market is to growing into a bubble. The chart below, also from BCA Research, shows debt as a percentage of disposable income in China and in a number of developed-market countries. More than half of the developed countries had debt in excess of income, with Denmark and Ireland pushing 200 percent.

 “China is at the far other end, with debt totaling just 44 percent of disposable income. Furthermore, homebuyers in China put down at least 20 percent as a down payment (30 percent for a first-time buyer and 40 percent for a second-home buyer to damp down speculation). These buyers rarely fall behind on their mortgage payments.”

It’s useful to see an opposing perspective on the housing bubble issue. Although, while the writers indicate that “household disposable income in China more than doubled during the period” it would be interesting to also see how household income tracks against real property prices. Unfortunately, there’s still no way to pay your mortgage with your per capita share of GDP.

You can read more about the residential real estate market in Frank Talk’s coverage of how there is no housing bubble in China.


Rocky Vega,
The Daily Reckoning