China’s Housing BubbleBy:Immad BaigTony LiSebastian AnayaHoward LiuDaniel KoJoel Baeza

Some BackgroundChina’s Population: 1,355,692,544

➢ China’s real estate bubble began developing around 2005 due to very low interest rates and speculation.

➢ Between 2005-2009, property values had tripled in several parts of the country.

➢ Members of the middle-class couldn’t afford to purchase these high priced homes in popular cities, therefore several “ghost cities” appeared with vacant buildings.

➢ To maintain high GDP growth, the Chinese govt. continued to overinvest in massive infrastructure projects meant for real estate development.

➢ In 2011 the bubble began to slowly deflate.

The Current Situation➢ China’s economy is vulnerable

because property investment accounts for anywhere from 16 percent to 20 percent of GDP and it is dropping at a fast rate.

➢ There is too much supply, while demand is low.

➢ Prices continue to go down.➢ The current downturn in the

real estate market is effecting related products such as steel, wood, appliances, furniture, etc.

Property Law of the People’s Republic of China

➢ Land is owned by the government➢ 3 categories of land

○ 1) state (government) - urban○ 2) collective - rural and suburban○ 3) private - residential, industrial, educational, commercial,

scientific, etc.Note: private in terms of being able to lease land, which belongs to government

Lease Terms➢ After rental period is up, land is on the market. ➢ Land is transferable during lease, but is subject to a fee.➢ Land for agricultural purposes can’t be converted for other use.

Government Action

Rural

1) Cash for loss of land

2) Resettlement subsidy

3) Compensation for structures and crops

Urban

Takeover for public interest, renovation of old towns, expiration of land contracts without renewal, end of use for public infrastructure

“Appropriate compensation” for loss of private property with cash and moving expense costs, or replacement structure

Leaseholder can petition with land administration department

-Possibility of lawsuit against government

Regulations➢ Foreigners are discouraged from buying homes due to hurdles

○ ex) must live in region for X number of years, have paid social security taxes for X years, have to be married, etc.

➢ Big cities such as Beijing, Shanghai, Shenzhen, and Guangzhou limit residents to 2 homes and nonresidents to 1. ○ Purchase of second home is made difficult with harder to

obtain bank loans, higher interest rates, and more than usual 30% downpayment

ComparisonIn most years, Chinaand US have the sametrend. However, in 2008 and 2009, Chinese real estate price rise up quickly.

The increase of price is not unreasonable. The population increase rapidly. It indicates that the demand continuingly increases.

In US, real estate change with GDP and disposable personal income. However, China is different. Real estate price has its own trend and its growth rate fluctuates a lot. Actually, it is affected more by regulation.

Impact on Economy ➢ If China’s housing prices were to fall by 30 percent, it would

have knock-on effects across the economy, causing a “severe downturn” in construction and steel production.

➢ Investment in rail and public utilities would also fall substantially “as the slower growth of cities and fewer land sales would cause local governments to delay infrastructure investments.

➢ China’s GDP would slow dramatically, to 4 percent annual growth, down from 7.7 percent last year; that would give China’s economy its weakest performance in 24 years.

Investors Reaction On Stocks

•Investors are short selling among 200 companies.

Investor’s Reaction On Housing

• Even though construction companiesare slowing down on constructions,inventory is still rising high.

• China’s GDP growth in lastdecade was fueled heavily byconstructions and infrastructure.

• “We are definitely more cautious about buying land this year” - Yang Duo

• With this rate, we can see that real-estate bubble is deflating.

Estimation of China’s Future GDP• 10.5% (2010) 9.3% (2011)

Estimation surveyed by China National Bureau of Statistics

Institution - Bank Loans

Government’s Confidence• China is making corrections

• The China Household Surveyindicates 30% price drop would only cause 3% of households to go underwater.

• The blue line and the green lineis the cyclical pattern of bubble,but red line (Chinese propertypriceline) is not fitting in to typicalpattern.

Investment Strategies

➢ You have to be patient and mindful.

➢ Don't panic, will not be as bad as the U.S real estate crash.

➢ Different outlooks for the short run and long run.

➢ Recently housing starts decreased by 22% compared to the previous year.

➢ Related industries will fall.

➢ In the short run, you might want to short sell stocks in the construction and raw materials industries.

Long run

➢ Bank regulations should prevent bad loans.

➢ Less people will default on loans.

➢ Tougher anti corruption movements.

➢ Transactions and investments should be more secure.

➢ Since we expect the burst to be smaller than the U.S one supply and demand will meet much faster.

Resourceshttp://www.scmp.com/business/money/markets-investing/article/1225513/new-rules-complicate-buying-property-china

http://qz.com/194702/does-china-have-a-housing-bubble-heres-why-nobody-knows-for-sure/http://wire.kapitall.com/investment-idea/chinese-housing-bubble-will-these-stocks-survive-if-it-bursts/

http://wire.kapitall.com/investment-idea/housing-bubble-shorting-chinese-stocks/http://blogs.wsj.com/chinarealtime/2014/05/05/chinas-property-bubble-has-officially-popped-report-says/

http://www.forbes.com/sites/kenrapoza/2014/06/02/major-china-cities-see-real-estate-bubble-deflate/

http://www.forbes.com/sites/kenrapoza/2014/06/19/no-violent-pop-as-china-housing-bubble-continues-deflating/

http://en.wikipedia.org/wiki/Chinese_property_lawhttp://www.youtube.com/watch?v=uxjwhk1ktNwhttp://www.washingtonpost.com/blogs/wonkblog/wp/2014/05/15/is-chinas-housing-bubble-popping/http://www.businessweek.com/articles/2014-07-02/how-bad-would-a-housing-market-crash-be-for-china

http://www.businessweek.com/articles/2014-05-19/is-chinas-housing-bubble-beginning-to-burst