Is the Real Estate Cooling Down?

I posted Hard to Buy a House in Shanghai in August, 2003. One year and a quarter past. When we enter the new year of 2005, does the situation change? Is the real estate price cooling Down? The answer is definitely no.

My friends went to see a newly opened property near my apartment in Pudong (namely, Hai Shang International Garden). Their price is pretty good – 9000 RMB per sq. meter. They just opened and people rush there. There are so many people waiting to buy the houses that the development company made the following rules:

  • The right to buy the house is based on lucky-draw.
  • All buyers needs to register with their National ID and hand in 20,000 RMB first to be entiled to the lucky-draw.
  • The winning rate will be one out of 50. That means, only one person out of 50 candidates will be granted the right to buy their houses.
  • If you want to make sure you can buy one apartment, show them 1 million RMB in cash.
  • The 20,000 RMB will be returned to those failed in the bid.

Sounds crazy?

7 Days and 7 Nights to Buy House

At the other property near the Centuary Park (about 20 minutes walk from my apartment), they just opened to public. People waited outside (in freezing air and experienced snow) for 7 days. They stand, eat, and sleep in the line. The price for the apartment is 16,000 RMB per sq. meter (or 2000 USD per sq. meter). This is based on the description of my friends living in that area.

Sounds crazy?

Shanghai’s Real Estate Price is Still Rising

Despite of all kinds of negative information on the Shanghai real estate market, the price of the apartments kept rising in 2004 and entered the fast raising period. It is astonishing, strange, and confusing!

34 Comments

  1. Alas! The train never stops for those who procrastinate! What is happening to Shanghai today is exactly like what happened to Hong Kong in the 80s. I hope this time Shanghai is different, especially the ending part of it.

  2. “Fast rising” prices are not uncommon in bubble situations in most markets. Witness between November 2000 and March 2001 the NASDAQ “rose” at its fastest pace over that particular cycle. We all know what happend in early 2001. So there is a logic.

    In another field, the last few months of World War Two were the bloodiest. So is the cold at the end of the winter. Go figure.

    Comments welcomed!

  3. Nobody can really predict the end of the story. I remember when it was in 2003, everyone claims the end of the crazy age. What is more crazy is that the same situation repeated every month. I am very interested to know whether it is a economy miracle or another bubble.

  4. I’m still optimistic about Shanghai’s so called “real estate bubble”. Think about Nasdaq and Bay Area’s housing market since year 2000…

  5. It is just too much of a bubble !

    I owned a house in my homecountry long time ago. The prices rose, and I bought a CHEAP house. 2 years after I was going to sell it. Suddenly the boom stopped, and it was imposible for me to sell, even people thought the location was good and the price was right. After a year, the house was sold for 70% of my buying price. The loans was still to pay every month !

    Even if I had the money, with my experience I would not risk to invest in such a “bubble”-market. So – beware !

    Especially young people runs a great risk of spending the rest of their lives to pay back the huge loans.

    I wouldn’t believe this market to last for more than a half or one year.

    People only buy now to make investments, because they believe they can sell for a high price in a few years. Many actually don’t live in the apartments.

    And it is quite limited how many chinese who REALLY can afford to live in an expensive apartment in Shanghai.

    Yes – it’s just a bubble !

  6. i agree there’s a bubble- i think prices will drop once short-term investors can’t sell off to the next person, but don’t think prices will tumble too far as there’s still a strong demand for property and real estate here.

  7. No bubble in Shanghai’s Real Estate Market, the Real Estate will continue to boom for at least another 3 more years. Shanghai’s Real Estate market is only in it’s teenage years, as well as China’s economy. I think Shanghai’s Real Estate market is parallel to China’s economy.

  8. I’m not so sure Shanghai is in trouble. It will continue to attract the usual wealthy elites from both home and abroad. The much bigger problem (and bubble) lies in all the provincial capitals and cities that are trying to become “Shanghais” by building ridiculously large luxury condo complexes that almost no locals can afford to live in (Zhengzhou, Urumqi, Xi’an, Chengdu, Lanzhou). I was actually a bit in shock at the number of huge, abandoned buildings in these cities. Like no one bothered to check demand before building a fifty-floor tower! I think Shanghai’s image is a bit too important to China for the government to let things get out of hand, but in many other parts of the country, real estate development seems quite reckless and ill-planned. I remember reading somewhere that a big chunk of China’s economic boom is tied to real estate development and construction, so if that’s the case we had better hope the bubble isn’t too big.

    My friends (graduate students, young professionals) in Hangzhou complained about the complete lack of affordable housing despite the insane amount of new properties coming on the market there. The attitude in Chinese urban development these days seems to be “why build one, twenty-floor building when you can build twenty thirty-floor buildings, paint them gold, put a big fountain in front, and then sell them all to another wealthy person who will keep them all empty to inflate demand.” :)

    I think the gov’t in Beijing has realized this, hence the attempts at more strict control over land use. If it’s so easy for developers to get huge plots of land for nothing through corruption and political connections, there is no incentive to be cautious or realistic in their development plans. And few local gov’ts will disagree, because these sorts of wild mega-projects mean construction jobs, not to mention making their district “look modern and wealthy”. Sorry for ranting like this, but I’m really fascinated by Chinese urban development and what drives it. And on a completely different note: Wang Jian Shuo, I’d love to read more of your thoughts on the US, not to mention see more pictures, you have a great eye for city scenes and architecture.

  9. If you ask me, I would say, based on my limited knowledge on real estate and my observation, I would say that the rising of the house price is reasonable and continous. The situation may change dramatically after several years or as soon as several months, but it does not harm to record my current observation here for future reference.

    I still believe the Real Estate will go strong. The economy in China is so strange that economists have failed in forecasting for many times.

    When the an apartment cost about 2000 RMB per sq. meter, people already claim it is high, and I saw it all way up till 2003 and the same property reached 10000 RMB. Now they are marching toward 20,000 RMB per sq. meter. The claim is the same.

  10. I read an article on the 11/6/04 South China Morning Post titled “Families in Shanghai, Beijing lead debt stakes”. To my surprise, according to a study by the Chinese Academy of Social Sciences, it was revealed that the soaring cost of housing has pushed the average family in Shanghai and Beijing deeper in debt that their counterparts in New York and Washington. Defining family debt ratio as debt as a proportion of disposable income, researcher Liu Jianchang found that the average family in Shanghai had a debt ratio of 155 percent and in Beijing 122 percent. By comparison, family debt averaged 115 per cent at the end of last year in the US, the western country with the highest personal debt.

    At the same time officials in Shanghai and Beijing “boast” to foreigners that property prices in their cities cannot come down before the World Expo of 2010 and the Olympics in 2008, a belief widely shared by the public and a media that fuels the real estate frenzy. Liu said that personal debt levels in China and other developing countries should be lower than in rich countries, which provided free education, healthcare and pensions, services which most Chinese have to pay for themselves. The SCMP article ended with a quote from an official saying that, “Property prices in Shanghai can only go up!”

    The two phrases that you hear most often at the end of any investment cycle are:

    1. This time is different!

    2. Prices can only go up!

    I have seen this movie before and the ending wasn’t happy.

    Booms are born in depression, come of age in skepticism, mature in confidence, and die in euphoria.

  11. with the ceaseless rising of house, i cannot help asking: what is the advantage of shanghai???

    how to attract the investments and talented young people?

  12. Good point, simplu !

    Dangerous traffic, crowded green parks, all thing grow double or triple price in high seasons, heavy pollution, expensive, etc., etc.

    I simply live in Shanghai because my work and darling is here.

    Not for the charming city itself.

    I prefer open space, fresh air, forests and mountains.

    I have to go to remote places for work, because the original locations are occupying expensive land, so they move factories, shipyards and other industries far away now.

    More transportation then…

    Note that many foreigners comments of the real estate market future are more realistic than what the chinese locals can see.

    We have seen economies go up AND down more than one time.

  13. I was living in Shanghai until end of November 2004. The apartment complex in XuJiaHui in Shanghai I rent at that time is fully sold but at night I counted only about 1/3 of the units are actually occupied (with lights on). The rest of the units lay empty with their owners waiting to flip them to other greater fools. Good luck to them.

  14. Great to see comments from JianShuo and others on the property price in Shanghai.

    I’ve been watching this issue since last year, as my relatives in Shanghai told me to take a look at the market since they feel it is going to be right time to buy an appartment. BUT I think it hasn’t come yet. The situation in Shanghai and HangZhou is something like the smarter people have sold first batch of profitable appartments out, with cash in hands and strong belief that they will get same luck next time. Such speculation is based on presumption that purchasing power will continue to rise, and will go on as long as there are people following them. Since I’d buy an appartment just for my parents to live, not for the fancy “investment”, I’d rathere wait.

    Some comparision: The appartment price in Shanghai is already reaching townhouse price in Brussels now.

  15. I am not that optimistic on Shanghai’s Real Estate market. Simply compare people’s average income and the real estate price, you will know that 80% of local residents cannot afford to buy the apartments in Shanghai. When the price is against the market rule and becoming unbelievable, i have to say it is a huge bubble.

  16. http://www.nikonfans.org/archives/life/000126_crowded_shanghai.html

    Edward’s observation of the “competition” of people for everything – cloth, lift, shopping carts…. The huge buying power is there.

  17. To use people shopping everywhere and getting cash from ATMs to justify property prices in Shanghai that are totally out of proportion with people’s income is short sighted.

    Things always look the best at the peak of a cycle. In 1997 at the peak of the HK property cycle, there was prosperity everywhere. At that time people used to say “they use shark fin soup to rinse their mouth every morning” to show off their spending power. And then the bottom fell off.

  18. I’ll move to shanghai soon. I can’t wait to see the housing price going down. It probably would make my move more justifiable.

    I believe most people will be happy if the price goes down. Am I right here? Who will be hurt?

  19. If the price goes down, will you buy it? If you buy an apartment and the value decreases by 10% in the following one month, and after the other month, the value is only about 60% of the price you buy it. Will it buy in this situation?

  20. Mr. Wang,

    Real esate is a commodity and the price is determined by the supply and demand.

    The surge of the real estate price in the recent year is not a healthy situation for Shanghai, it only benefits those who have real estate in their investment portfolio.

    The major beneficiary in this scenario would be the government who is the biggest land owner and use the money in economic expansion. The most convenient way to boost the land price by the government is to limit the supply and she has done well to accomplish the goal.

    When price go beyond a banchmark when people can no longer support the price demand by the realtors, the real estate market will collapse and the domino situation sit in, that is when bank calls on loans. This is the what we call “bubble”.

    People in Shanghai perhaps never faces the real estate melt-down before, but look to what Hong Kong had done in early ’90s for the real estate and suffer the consequence thereafter.

    Nevertheless, the yield from the real estate is enormous for the government and it made tax revenue become insignificant. Should the market melt-down occurs, then the government will instantly left with no income and the economic hard landing will emerge. I don’t know what will happen to China.

    Mr. Wang, I hope you can see clearly what is powering the economic miracle of China and you better hope the real estate will stay strong in the years to come.

    Stephen

  21. shanghai is a bubble, but bubble may not pop immediately.

  22. The same condo in equivalent location in NYC would cost a lot more, $1 – 2 million. People like to compare Shanghai to NYC, thinking Shanghai would become a NYC No. 2. That logic has been partially behind and driving overseas investment in Shanghai. Only time will tell if that is the case.

  23. xge, No, not everyone will wish real estate price goes down in Shanghai/China. Most rich people who have lots of real estate investment don’t wish so.

  24. Bubble may not pop immediately. Bubble could last as long as a decade or even longer.

    Look at Bay area, it has one of the biggest housing bubble in the US. I remember it all started in the early 90s. Despite a small correction in the 02-03 time frame, it erased its corrected value and powered forward and reached an all-time high of $643K medium price.

    Bubble talk started way early in the mid 90s. Countless people predicted a crash in 96 and 97. If people believed in them and sold their houses, they would surely be very regretful today. Prices doubled since 97.

    The worse thing than a bubble itself is to call it TOO EARLY.

  25. When will the real estate bubble be bursted, may be no one can tell!

    I have just visited my mother who lives in Shanghai and she possessed another newly built apartment in the 34 floors complex in Puxi. I noticed after 10 months of completion, the occupation rate is not more than 10 percent when I count the lighting outside the complex during the dinner time, the vacant units are all in the hand of the speculators according to the realtor.

    Plainly I can see the real estate price is made artificially high by pure speculation, but when I see so many units in the market are not supported by the end users which means the property is only pay up to a margin, it does not take a rocket scientist to tell you the correction is imminent.

    Stephen

  26. I was talking about US real estate market. Both China and US have bubbles. But it’s a lot harder for US to pop than for China to pop due to their entirely different economic backgrounds between them. US is a mature market with real income level to support the bubble. Plus, during the current bubble, builders have not been making the same mistake that they made in the 80s by overbuilding. Therefore despite higher prices, supply is lagging behind demand in most metro areas. But China maybe a different story.

    Personally, I believe Shanghai (including BJ and Shen Zhen)’s real estate market will be due for a fall because price rise has exceeded majority of citizens’ affordability. This affordability issue will reduce domestic demand. The class of people that don’t have affordability issues already owned enough properties, they are no longer the driving forces. Foreign capital is a wild card that may or may not float the market. At least the domestic driving force is slacken off, leaving only the foreign capital as supporting factor. However, personally, I don’t think foreign capital alone is enough to keep it float, at least not the whole country. But one may argue that foreign capital may be able to keep afloat certain unique locations like Shanghai Downtown indefinitely. That’s possible. But I remember in the mid 90s, NYC downtown properties did tumble terribly. Why should Shanghai be exempted?

    Eventually, the market will adjust to a price range that would rekindle the domestic demands from vast majority of local residents who otherwise would not afford. But in the longer term, as income in China is going up much faster than expected, the long term trend for real estate market is very promising. But for the short and intermediate term, one just have to exercise caution.

  27. This weekend, I just came across an article in a local free Chinese newspaper talking about Shanghai real estate. The author claimed that Shanghai’s real estate appreciation can at least continue another 20 years. Astonishing! I would not claim he must be wrong because he does have some numbers to back him up such as China’s GDP growth and Shanghai’s limited land supplies. All may be true. But I am old enough to learn from the experience in LA, Hong Kong, Japan that such prolonged bubble (another 20 years) is not likely to happen. However, I don’t mean to imply that the bubble is gonna pop tomorrow. I think the author’s fortune telling capability is as good as the other media commentators who predicted the crash this year. As human, we simply don’t know no matter who we are. And it’s better that we don’t predict anything.

  28. People keep talking about a burst in California for the last 15 years but if you try to buy a house now you will deeply regret that you didn’t buy 15 years ago! dotcom crash, earthquake, 9/11, etc., have not dented the price a bit! Also take a look at London, NYC, Boston, D.C, …

    Even when comparing to the “bursted” Hong Kong, Singapore,Tokyo, the price in Shanghai is still a bargain. Of course, it will go up and down in the short term but if you have an outlook of more than 5 years, I think Shanghai will be in the same league with the other major cities in the world. There is one big difference: no other country has the size of China.

    Having said that, investing real estate anywhere still requires careful study of quality of construction, quality of management, and location, location, location! You can’t just throw money at any Shanghai property and expect to make money!

  29. We know all about the ridiculous real estate prices out there. Our site pokes fun at the ‘quality homes’ that command high real estate prices during this current real estate craze. As prices continue to rise, the average hard working individual who makes an average salary can no longer afford an average home.

    http://www.ridiculousrealestate.com

  30. hi , i am a chinese too . i so want to get a bbs address about buildings especially skyscrapers . could you recommend one to me ? 谢谢

  31. hi,anyone. i wish i was the last one read the post. now, it is 2008. there is no sign real estate cooling down. all the men in 2005,can we believe?

  32. You guys had a lot of debate about the real estate price in Shanghai back in 2005, now, its 2008, the proeprty sold at RMB 10000 now costs RMB 30000 on send-hand property market

  33. I’m sure if you look the price now it will be higher than in 2005 but if you wait 2 years more it will stop or down.

  34. The Chinese government is trying hard to cool down the real estate market, especially in the big cities such as Shanghai or Beijing. Banks have been pushed to reduce their loans to property developers since the government realized too many credits were given and helped the rise of real estate prices.

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