In China, there are too many people who build their dreams on an illusion. They thought they were creating genuine value during a house price spiral. Each individual of them, of course, has right to do it. But, the collective effect of their common doing is so monstrous that it drastically use up the working capitals of the nation, and more importnatly, corrupt the morality of an industrial society - they do not want to produce things; the only thing they want is to buy property and wait.

Creating homes for the poor or giving existing homes to the poor will cause housing estate prices to drop. That will not make property owners happy. I believe that happened in the 90's, early millenia in Hong Kong? People who can afford property are the people with money, the people who can be heard in support or against the government. Stopping them from making money, or even simply causing them to make less money than they would have, would make them pretty upset.

upsetting them isn't something that the government wants to do...

Yes, it's a bubble. It'll burst eventually, but there's still time.

Deal with reality when it comes crashing. Ignore it until then.

I find many of the arguments for why China's property bubble is not, in fact, a bubble systemically flawed on at least two counts. Typically, as occurs in the article referenced by the "overstated" link toward the end of your work above, economists trot out statistics on how leveraged households are in the PRC (the statistics indicating that they are minimally leveraged) to determine that many if not most large scale purchases are being paid up-front, in cash, and that this imputes a degree of stability to the system. To a certain minor extent, this is true; however, such an account fails to take into consideration the peculiar status of PRC citizens' "savings" by which such purchases are funded.

Simply put, PRC citizens' savings aren’t what they appear to be. They are almost entirely an aggregate of *already directed future purchases*, necessities really--in the domain of property expenditure for descendents who are unable to buy their own apartment, massive health care and education costs--in lieu of a sufficiently supportive welfare network. They are not by definition surplus capital laid aside for potential “disposable” consumption. The operative difference between the two is that when such savings are spent on a large investment, such as an apartment or a child's overseas education, the family absolutely requires the investment to generate a significant return in order to sustain family finances, and resupply the retirement nest egg. If it fails to do so, say if one's child salary fails to match the expediture on his/her education after graduating from an overseas program or if property values fall after an investment, it has the potential to bankrupt the family. It would seem the ramifications of viewing “savings” differently in China’s unique environment hasn’t really penetrated most economic analyses as of yet.

The second systematic flaw concerns how these "savings" are generated. Those who have garnered a network of friends and acquaintances in on the mainland may be aware that family “savings” of a couple million RMB (which is essentially the amount necessary to place down-payments on apartments in major cities) rarely come from incremental deposits of income over time—unless, of course, the members of said families were in the upper-income bracket of mainland Chinese a generation ago. The frugality of previous generations, while significant, was fiscally limited by depressed (relative to today’s figures) wages and salaries. Thus a middle-aged salesman for an industrial organization on the mainland 15 years ago may have considered himself very fortunate for earning 8000 RMB/ month, but the amount of disposable income that would have yielded would likely amount to no more than 5000 RMB after taxes and basic costs of living were removed. Assuming he could average that amount of savings each and every month, it would take 20 years to accumulate enough money (more than 1.2 million RMB) to put even the most basic level of down-payment on an apartment at today’s rates in major cities.

Of course there are all kinds of other factors playing into this. Rising salaries may play a role, but I’m already starting with an example of a person earning generous income in the previous decade. There is the further factor of households borrowing not from the banks, but from their extended families and friends (a frequent occurrence in China) and thus masking their down-payments as a form of official savings (at least negatively, by not registering in mortgages). This factor has yet to receive sufficient attention from those invoking the household leverage statistics, massive though it may be. Many Chinese families are indeed leveraged to others, just not to official lending organizations. But surely the one factor which particularly stands out, and bears significantly on the current real estate market, is that of resettlement compensation. The individual in my example above likely did not wait till now to purchase a home; he rather bought one at a much lower price decades ago and has since sold it, or his family was resettled and compensated for the value of their previous apartment. Savings are often “instantly” generated through windfalls in this manner. Most private (property) speculators on the Mainland got their start in the market through an initial government purchase of their home.

Now this is where things get interesting. The only economist I’ve seen who deals with generation of savings through windfalls on the mainland is Andy Xie, whose work is remarkably trenchant. Xie notes that “The overwhelming majority of end-user purchases [in real estate] probably came from resettled residents who used their compensation cash for down payments. Resettlement compensation is the biggest transfer of wealth from the government to the household sector since the privatization of low-cost public housing a decade ago. It is probably the most important government action supporting today's economy.” That is, people receive windfall amounts as compensation for homes that are demolished by the government and then apply that compensation to down-payments on further apartments, generating more demand and industry, driving growth. But one can’t understand the full impact of this situation until one considers what that means for the argument that Chinese property purchases are normally financed through “savings”. If “savings” are generated in such a manner, they have a rather odd status. In order to compensate home owners through resettlement, local governments must take out *institutional loans* and use the land as collateral. Thus, in effect, Chinese “savings” for the purchase of new homes undertaken in such a manner are actually reprised forms of debt, not household debt but government debt, which is now heavily involved in the property market [state-reported statistics for the first quarter of 2010 show that the government was responsible for 42% (!) of all property purchases in Beijing]. Xie makes the point frighteningly clear: “[Resettlement compensation] uses a form of leverage to support demand. Local governments borrow to pay compensation packages, using land as collateral. Resettled residents use compensation cash as down payments for mortgages. In this way, *government debt becomes equity for mortgage debt; there is no real equity in the financing chain.*”

Xie has shown elsewhere why this tactic is self-defeating (and least with regards to social and fiscal stability, though it certainly is effective for long-term kleptocracy) and potentially disastrous. The government must thus keep property values from falling, or it cannot even begin to balance its books—nor can the state banks, who supply the institutional loans. And this basic depraved structure comes on top of all the aberrant and wasteful investments made by Local Government Investment Vehicles.

It was always on the cards that the bubble would burst.too much debt in a debt driven economy
We need to go back to basics
And will future generations bail out the previous?
salesjobs

I could have sworn the author was talking about US until I noticed he used the word China.

Therein lies extreme hubris and near total ignorance of the fast changing world around him.

This is so typical of so many americans. if you can't make others conform to you, why not simply start make this up on a grand scale to maintain a sense of security and familiarity.

it has morphed into pathetic situation. This can't possibly end well for the dream weavers and their audience.

I suggest you don't worry or have sleepless nights for china. China is well capable of managing her own house thank you. much more capable than your long hidden disaster and the train wreck that is Us economy .

I suggest you look inward for a change and forewarn the people of the us the disaster that is about to hit them.

I live in china and have been watching this bubble continue for the past 2-3 years. Many thought it would break after the Olympics came and past. However as mentioned above it is still funded by to primary parties -
wealthy and state run companies. Both have incentives as mentioned in the preceding articles in where to put their money and how to get more loans.

If the money was spent building affordable housing that would of course allow both groups to rent in the future and earn money from their now somewhat depreciated investment. however most are building "luxury apartments" or accommodations. At first glance this would actually seem to be a good thing, but here in lies the problem.

You see if the government views Luxury apartments as being superior in quality then they call allow the bubble to proceed until it bust. it means then that a large amount of good quality and now affordable homes would be on the market.

But this is where china the state run companies and wealthy investors lack basic experience that most construction workers from developed countries will pick out right away. That is poor quality. In the US you saw very poor quality of work when the building boom was on in many of the housing market. In addition to cheap loans another problem arose where people who did not know how to care for a house were suddenly owners.

So with the bubble bust the market started to see first the real worth of the home which were greatly affect by poor building and poor owners. Had true worth been created the homes would still be work the material + labor put into them.

How does this relate to china? While the building quality has greatly improved (10 years ago I saw regular cold concrete shunts in 30 story high rises, today I see relatively few). However they still have many problems with the basic building blocks beyond structural. If you see a building here that looks 15 years old, it is probably 5 years old.

So even if people don't live in the building in 5 to 10 years they will be literally falling apart. This includes these luxury apartments. Any metal component literally degrades without any usage, this include internal wiring. This is due to the pollution and other environmental problems along with contamination in the manufacturing process. So what then happens is only the building that are built with quality will be worth any type of investment. This then leaves a very bad situation to those in china who are not the wealth or very knowledgeable. The state run companies in the end don't care I they loose as long as in the short term they gain. The wealth should know how to get quality if they don't they won't be wealth long, the smart will try to dump before it breaks.

So that leave the lower upper class or those who truly are stretched to make the loans. They will be left holding the bag of poor quality luxury apartments. These will then probably be taken over by the government and turned into affordable housing which will ill suit the dwellers. Then left to crumble. The state governments will get incentives to turn over theirs to be converted and they will of course keep the best ones.

So in the end the wealthiest stay wealthy, the poor are left with junk and the economy will slow but have plenty of work rebuilding all the crumbing buildings, while inflation ensure the common class will l only have to work 50 -60 years to afford a sub par home.

Thus the throw back to the sum landlords I knew all to well in NYC and other large cities.

With a monopolistic economic system, China can surmount real estate bubble much more easily than a free market system of US can.

All Chinese government has to do, is to issue low interest bonds to cope with defaulting bank loans and the bankrupt banks so that the problem of 'real estate' bubble will be put on the shelf while Chinese economy continues to expand and export endlessly.

That is the beauty of one party dictatorship. One can accomplish almost any task by fiat.

With a billion plus consumer market, government can decree that 'all the empty real estate shall be rented out and government will confiscate any vacant property'.

There are so many ways that impossible problems can be solved very easily once the government does not have to answer to anyone.

You gotta love the Chinese govt's approach to everything it slightly disagrees with it: censor it. I am so glad I do not live in China. Prosperity without freedom sounds awful.

I read that the Chinese citizens have no right to declare Bankruptcy.

How will there be a bubble? They could keep citizens tied to assets for life and collect 50% of their income no matter what it is and let them stay on the property.

Unlike the US having to wipe Trillions from banks books and the following crash that destroyed home values.

China's got tools to use, no bankruptcy rights for it's citizens. They could also devalue the Yuan by 50% easing debtors liabilities and greatly increasing exports/jobs in the process.

The US refuses to devalue the dollar to create jobs/exports. Too many fatcats enjoying their lush lifestyles on the top who don't care about the homeless/jobless on Mainstreet.

As more and more western countries default and their economies weaken, the market for China industrial output will dwindle. And the second dip in the current recession will likely be worse than the first. The reason is that nothing was done during the first to correct the real underlying problems. The multinational corporations continue to move headquarters (as little as a post office box) to locations to escape tax while moving factories to locations where labor is essentially free. The power elite have siphoned away the wealth to other tax havens.
This has caused the progressive weakening you see in traditional industrialized nations and the fall in tax revenue to below that required to support government function. Printing money has propped up this house of cards but it looks to me like the ultimate collapse is upon us.
As long as multinationals are allowed to continue unchecked to "optimize their structure for maximum gain" (exploit what amount to slaves, pay no business tax and pay no executive income tax) the purchasing power of the citizens of the formerly industrialized west will decline and tank China exports. China can call in international loans but on a massive scale this will only kill the goose that laid their golden eggs. That China is a self sufficient dynamo is only a Goldman myth to salve investors. As we all know workers there have no purchasing power and cannot afford the products they now mass produce for the multinationals. The death spiral will continue faster and faster until the multinational monopolies are broken up into controllable entities and forced to produce locally in the industrialized west again.

And I thought it was in just the US and EU that was having troubles. But I still think you needs the relax! Get some good massage therapy and feel better, friend.

This article complements the FP report on the China's housing bubble.
http://www.nytimes.com/2010/05/11/opinion/11iht-edbowring.html?scp=1&sq=bowring%20china&st=cse
Interesting quotes are
1. A 20 percent fall in peak prices could occur, but this should not hurt the banks because few purchases are made with less than a 20 percent down payment.
2. Given minimal household debt levels and low direct bank exposure to property, China can afford some housing bubbles and busts, just as other East Asian countries did in decades past.

From http://news.bbc.co.uk/2/hi/asia-pacific/8665458.stm
3. "Here one quarter of all buyers are paying all cash, the minimum down-payment is 20% and our estimate is about half of buyers have to put 30% to 40% cash down," he says.
4. That is one reason China's property market might not turn from boom to bust as many fear. Demand is still strong here.

On statement 2 China property boom is much like Singapore.'s over the last 40 to 50 years There were quite a few cycles of boom and lull, but no significant downturn even in an economic downturn. When one has put 20 percent plus several years of mortgage payments into a 30 year mortgage (therefore high equity) one is obliged to hang onto the property. There were well to do speculators who overextended themselves. They lost money but not the banks for property prices held and there were plenty of new buyers to snap up distressed properties. If private property speculators lost money it tough for them. But they had minimal effect on the banking system. Bernie Madoff's multimillionaire investors lost their fortunes. That didn't affect the banks either. China's property boom will not mirror the West's bust.

An interesting post to go through. As more and more western countries default and their economies weaken, the market for China industrial output will dwindle. And the second dip in the current political news current recession will likely be worse than the first. The reason is that nothing was done during the first to correct the real underlying problems. The multinational corporations continue to move headquarters (as little as a post office box) to locations to escape tax while moving factories to locations where labor is essentially free.

China's housing crisis is much worse than the one in the U.S., according to a Chinese government minister, and given the scale of its pumped-up real estate bubble, suddenly deflating it could have global consequences. The worst consequence of a burst housing bubble might be a huge spike in interest rates. But fear of an even bigger force Chinese citizens' anger at the high cost of real estate could tame China's efforts to constrain the housing market and home insurance quotes. The good news for the rest of the world is that China's banks don't securitize residential mortgages and so aren't at risk.

A bust in Chinese real estate would hurt property developers instead of bankers and homeowners. If the Chinese government decided to help bail developers out, it might sell some of its $2.2 trillion in U.S. debt holdings, and those sales could raise U.S. interest rates -- depending on the appetite for that debt from other investors around the world home insurance rates. But in all likelihood, China's primary concern will be keeping a lid on social unrest, which is likely to burst out of control if its people get too frustrated because they can't afford a place to live as they move from the country into the urban areas.