The “What If” Housing Bubble in China

August 29, 2010

Charles Hugh Smith writes for the Daily Finance and claims that China’s Housing Bubble Will End Badly.

That’s not going to happen for several reasons. The first reason is that China’s economy does not depend on the housing market to survive. Most people in China still don’t own their homes even in the cities.

In the US, housing loans to GDP were 79% but in China, that number is about 15%, which means real estate in China doesn’t prop up the economy.

Let’s look at one fictional individual who loses his job in China and can’t make his mortgage payment.

If he always lived in the city and has family (even distant relations), he will move in with them and rent his home to make the payments. The family may even pitch in so he doesn’t lose the home.

If that fictional Chinese man came to the city to work from a village, he returns home.  The peasants in rural China don’t have to worry about losing those homes.  In fact, it’s as if China had two economies: rural and urban.

If the government needs to develop the land the peasant’s home sits on, a new home is provided. More than seven hundred million Chinese live in villages owned by collectives and the central government. Those peasants don’t have a mortgage payment, pay rent or property tax.

Even in urban China, people only pay property tax once when they buy the home they live in.  Property tax for your home isn’t an annual burden as in the US.

Another factor is that the average savings rate in China is 40% and the wealthiest Chinese own about 40% of urban real estate.

See Betting Against China’s Housing Market

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Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.

To subscribe to “iLook China”, look for the “Subscribe” button at the top of the screen in the menu bar, click on it then follow directions.

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Betting Against China’s Housing Market

June 21, 2010

You may have seen stories or headlines predicting a housing bubble bursting in China as it did in the US. China bashers are probably praying this will happen, but don’t count on it.  Placing a bet that China is going to stop growing its economy soon is throwing money away.

The Market Oracle talks about this in “Will China Housing Market Follow the U.S. In a Mortgage Bust?” Although the Bank of China held $10 billion in US subprime assets when the  US bubble burst, Chinese banks don’t make those loans in China—the risky subprime loans to poor people with bad credit was in US. The only reason the Bank of China held those assets was that they trusted America—then.

Older Housing in China

The real estate market in China is different. Chinese families contribute and buyers often pay 30 to 50% down. Also, when the bubble burst in the US, housing loans to GDP were 79% but in China that number was 15.3%.

In fact, according to the May 29 – June 4, 2010 The Economist, about 20 – 30% of urban housing is owned by the top income earners. The rest live in free housing provided by employers or in  state owned housing with low or no rent. It also helps that most Chinese save and avoid using credit cards. Then there is rural China where 750 million live and all the housing belongs to collectives and there are no mortgages or rent.

See Greedy Buyers Beware

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Lloyd Lofthouse is the award-winning author of The Concubine Saga. When you love a Chinese woman, you marry her family and culture too. This is the love story Sir Robert Hart did not want the world to discover.

To subscribe to “iLook China”, look for the “Subscribe” button at the top of the screen in the menu bar, click on it then follow directions.