Is the Real Estate Cooling Down? – Part II

This is part two following the last article Is the Real Estate Cooling Down?

I attended a conference on Investment in 2005 today. To be honest, I have very few investment and financial knowledge and I never care too much on the financial numbers such as the government debt and raise in gold price. I was surprised to see so many people concern these numbers so much.

One of the argument was about the trend of real estate price. I asked the question about the real estate bubble of Hong Kong and Hainai and asked about their compare between Shanghai’s situation and other real estate crashes in the world. The host answered my question. I found it reasonable.

Regarding the crash in Hainan, it was not an economy crash. It was purely cheating. No houses were built after the real estate developer got the money. They spent it elsewhere.

The biggest difference between Shanghai and Hong Kong is, Shanghai is in a closed economy. Renminbi is not free trading currency. You cannot exchange Renminbi to any free trading currencies, like USD or Canada Dollar. That means, people in China cannot invest in investment with higher return. So people have to invest locally.

People have been very disappointed in the stock market in Shanghai or Shenzhen. Huge amount of money goes out of the stock market. There are very few investment channels for the capital, so real estate has to accommodate the money. The money comes not only from people in Shanghai, it comes from all across the country. The number is a strong indicator that 40% of high-end properties in Shanghai Real Estate market comes from outside Shanghai.

So the conclusion is, the real estate price will keep raising until Renminbi becomes a free trading currency. At that time, money will flow away.

Disclaimer: It is just one of the opinion I heard. It does not represent my point of view.

41 Comments

  1. Dear Jian Shuo,

    First I would like to commend you for doing a first class job with your blog. I enjoy reading it daily.

    Now onto the property market in Shanghai. You can always come up with reasons for irrational exuberance. I have seen this so many times at the tail end of the boom. Remember the goldilocks economy of the US in the late 1990s?

    It’s pointless to put forward counter arguments here as this will just go on and on. Time is the best judge. Let’s re-visit the subject one year from now and see how everything goes.

  2. Exactly. Yesterday, when I chat with my friends, I said: “If I have time, and if I had the permission take documentary, I would like to make a documentary by myself. The end of the Real Esate story is so mysterious and everyone are so eager to know the result. There are completely two side of the arguments here and the world seems to be crazy. I want to do some interview with people and record what they are thinking – to buy or not to buy. It must be very interesting if we re-visit the film about 1 year, 3 year or 10 years later.” Only time will tell us the result.

  3. Dear Jianshuo: I love to read your blog espcially when I am abroad right now. My sister has just bought a second hand apartment in LuJiaZui for 2.45M RMB. The unit price is 12,900RMB including luxurious decoration and furniture. I think the price is quite good. Here are some of my analysis:

    Do you know how much we have to pay in a city with population less than 800K like Adelaide for an luxurious apartment in CBD or around CBD? As big as the one my sister have would be more than 1M Australian dollar. In Sydney, that is 2M at least (Need comments). The GDP of Australia is $20000. So if Shanghai’s position is just as important as Sydney, divided by 5 (GDP $4000 Shanghai), At least you have to pay for 500K Australian dollar, that is more than 3M RMB. Everyone knows Shanghai has more important position and potential than Sydney and its population is 6 times of Sydney (Need comments), its CBD (inner loop) area is 3 times of Sydney at most. Calculate the price out. Some people always cite the price of the other countries, say in Canada, in Australia, you pay 1.5MRMB you get a house with garden, and blar blar. That’s not true or at least comprehensive. Real estate is all about location. In Adelaide, if you buy a house in poor location, yes AUS $300K you can buy a 3 bedroom house with a spacious garden. but the house is poorly built, crappy decoration, no easy access to shopping facilities, no decent restaurants, no good public schools, smaller tree. But to buy a house in the town at better location. You have to pay at least AUS $500K for the same size. And if you want to buy in a even better region and a better constructed villa, you pay at least AUS $700K for the same size.

    I am working as a research assistant in the Uni. right now. Because only I work, so my family income here is at lower part of the local standard. And I rent an apartment in the district like Lu Wan or Hong Qiao in Shanghai, I pay nearly half of my expenses $10000 per year for a 70 m2 unfurnished apartment. You know how crappy the apartment is, there is a hole on the vinyl floor, and the landlord just put a patch stick on it. Every time we take bath, we have to withstand super hot to bloody cold because of the 10 years old gas heater. I think the GDP is always directly proportional to real estate and living expenses. In Adelaide, if we want to have a better living standards than we have right now, We have to pay at least $15000 per year on rent and that will be doubled in Sydney. And still, rent is cheaper than buy because of the poor saving capability in those developed countries and high taxation and high interest rate for mortgage.

    So we should change our mind, buying a house in a good location is not affordable for everyone, even in those developed countries. It is scarce resource and should be expensive. If you want to live at a reasonable good place for your income level, you have to pay 40% of your expense for renting. For example, if my family income is 5000RMB per month, I may only feel those house for rent at 2000RMB per month is nice enough. This is true. Look around, if I rent a house, I would definitely have to pay that much in Shanghai to have something similar to what we are living right now. If you have 5000RMB per month and a child, will you rent a small two room apartment in worse location for 1500RMB? Probably not. And if you want to have even better location, even better quality, your income must be 10000RMB per month. Am I right?

    So I am quite positive about the fact that Shanghai real estate will not drop, only rise in a much slower pace on average. There might be bubbles, but not everywhere. And good location will always have good price. The GDP of China is only $1000 and $4000 for Shanghai, do you think we will stop there? I think at least till $8000 there won’t be recession.

  4. Real estate market can be very irrational at times. Lack of RMB flow may be one reason, but personally I don’t think it is the real key reason. It was reported that now 40% of property investments in Shanghai are from foreign money. I think this is a bad sign. Here is the my reason:

    The risk of an investor dominated market (like Shanghai) is very high. When investors see that the trend is no longer favorable to

    their investments, the houses in their hand are only money symbols rather than a place to live. Big investors will pull out their capital very fast, even at some loss. A few big investors will start to dump their properties at below market pricing to force a quick sale. They will trigger a domino affect to medium and smaller investor communities. In a 40% investor market, this domino effect will pull down price very drastically because there is very weak buttress supporting this market.

    Residence dominated market (like most US markets) are much safer. Residents view their property as a place to live, not completely a dollar symbol. They usually don’t sell when the market is getting weak, they simply pull their listing out of the inventory. This action will keep the supply and demand in check.

    Barring a sudden, and big scale cut back of job creation, the risk of bubble in the US is quite low.

    Look at US history, the worst crash, If I remember correctly, happened to LA in the 80s. That was a 30% drop. But when the same thing happened to Hong Kong, it was a 70% drop. Because HK was like Shanghai today, a high investor market. We need to notice that both LA and HK are high liquid markets.

  5. Some people love to compare Shanghai with some other influential metro areas in the world, like comparing SH to NYC. But they are not comparing apple to apple, rather they are comparing apple to orange. :-) Income level, demographic composition and underlying economic buttress are very different. You simply can’t compare and hope to draw any meaningful conclusions. For example, NYC with her million dollar average price in Manhattan will sustain longer than Shanghai would, even if Shanghai’s average price hasn’t reached 1/3 of NYC level. Shanghai is *intrinsically* a much more risky market than that of NYC. Shanghai is now an investor driven market.

    When a housing market becomes investor driven, it’s transitioned into a market like Equity market. Simply due to the fact that investors can’t bail themselves out when the real trying times arrive. When the bad times come, investors will react to it by ridding themselves of the properties as fast as they can. This was what happened to Hong Kong.

    Thus, easily triggering a massive sell off.

    I don’t mean market like Shanghai will cool down immediately. God bless Shanghai it won’t drop because if it does so, it’s gonna a killing field. Currently Shanghai still have that buzzes. So the market will probably rise a little more, making more people anxious.

  6. Further more, an equity-like property market is worse off than a real equity market (stock market). Why? Because real property are *not* liquid. When you want to sell it, you may *not* be able to sell to anyone for a long time. While in a real equity market, you can still sell stock at a reduced price, and avoid being bagged for a long time. But when bad times come, no body will be there to hold the bag for you until the next cycle start over.

    The key to make money in a real estate market is how you can weather the bad times, quote Donald Trump’s golden word.

  7. After collecting some information, I think it is the time we pay attention to the following factors:

    1. Sometimes when all investers withdraw money from real estate market, the bubble will crash. This is true. But in a closed economy, people have no choice. In LA or HK, people can move the money from one country/region to another quickly. In China, you put the money into real estate. If you withdraw your money, tell me, where do you put your money. Please note: you cannot put it into any investment abroad (maybe you can, but majority investors cannot.). You cannot put it to stock market in China – fewer people believe in the stock market in China now. To put it into investment like REITS? There is no such investment channel yet. It seems you only have to put it into bank and enjoy your 2-3% interest.

    One day, the foreign investment channel will open to China investers. When it happens, money will flow away and the bubble will crash. Before that, so many people with millions of dollars on hand have no where to invest their money. That is part of the reason why the real estate price raise so quickly – it is an indicator of the lack of investment channel.

    2. We do compare from apple to apple. The income v.s. apartment ratio is a key theory foundation for the argument that we should not compare Shanghai and NYC. World wide, the annual family income v.s. average house price is around 1:6. It is 1:12 in Shanghai. That means, 12 persons working for year can get a house in U.S. (considering two persons with income per family) or 24 persons working for one year can buy a house in Shanghai. It reflects the price of labor and the price of resource. Now the price of resources can be traded – all the goods that flows between China and U.S, so the price is comparable, but the labor price in China is much lower. Which means, it is quite reasonable that if the household income v.s. house raise from current 1:12 to 1:20 or higher. The secret behind it is, labor is over supplied in big cities like Shanghai and capital is over supplied (with huge amount of money flow in from around the country) but the increase of real estate properties does not catch these speed. So the price will continue to raise.

    I didn’t mean the price will continue to raise and raise. I agree there are bubble, serious bubble. But who cares. People only care about the bubble when or before it crashes. There are two important factors for the bubble to crash:

    More investment channel is open so people have more choices to move the money out of real estate.

    The ratio of household annual income v.s. Propertie price will drop below current 1:12 only when the labor cost of China increase dramatically.

  8. Interested in investing in shanghai,

    Like the one park avenue building and the kerry building.

    What is the best area / middle / upper class area.

    Reason for investing is that as a european property in shanghai is technically 25% + cheaper than it was last year (this 25% excludes the real estate price rise.)

    Any advice is welcomed on places to go capital funding and rent to expect.

  9. A few important “facts” to consider:

    1. Sophisticated real estate markets do not “crash”. They correct. Corrections can be significant, but real estate markets don’t bottom out (as equities can and do). Thus, a “bubble” is only a risk if your holding period is short, or if you are over leveraged (i.e. cannot make payments on debt).

    2. No one can predict the future. It has been shown time and time again that there have been less than a dozen (that’s right – 12) people on earth (ok, I mean fund managers, but whatever) who have ever beaten markets in the long-term. Those who are overly bullish, as well as those who are overly pessimistic, about the real estate market in Shanghai are purporting to be fortunte tellers.

    3. There are indeed many value-drivers that indicate long-term growth in the Shanghai real estate market. Not the least of which is a price comparison to other major cities. My understanding (and PLEASE correct me if this is wrong) is that prices for luxury apartments in Shanghai are still less than half of what they are in HK, Taipei, NYC, and Tokyo. Sometimes 1/3.

    If indeed the market does start turning down, I will be there to buy (not sell). And in the meantime, I remain a buyer in this market.

  10. Clemens Dreihann

    February 16, 2005 at 2:20 pm

    Check out

    http://www.rieti.go.jp/en/china/04111601.html

    I also believe that there is a significant risk of the bubble bursting in the near furture.

    With respect to capital mobility in China: There is a significant amount of foreign investment in the Shanghainese real estate market. Foreign investors, compared with Chinese investors, can withdraw their investments at any time and are free to reinvest outside China. Should they decide to do so, they could easily trigger the burst of the bubble…

  11. “Foreign investors, compared with Chinese investors, can withdraw their investments at any time and are free to reinvest outside China”. Is it true? Based on my information, they can put money into China but there is no obvious way to withdraw the money. Any one knows details?

  12. They can sell in US$ or €uro

  13. As for the percentage of foreign property investment (residential sector), the figure is not as bad as people would like to think. Here is the figure:

    House purchased by foreigners: 4%

    House purchase by individuals from other chinese provinces:15%

    House purchased by Shanghainese: 81%

    ~75% of shanhainese owned their house.

    According to rumors (no hard evidence or concrete number supporting it), up to 40% of the property bought in shanghai is for investment purposes by shaghainese, foreigners and individual from outside provinces. I personally agree with these figure.

    Not all foreign buyers look at shanghai apartments as dollar sign. Many overseas chinese (accounts for the majority of foreign buyer) who returns to the mainland bought houses for long term use. They ussually have other investment in china as well. Many also bought their homes as a way to express their nationalistic pride of their ancestor land (minority). In my opinion, the overall health of the chinese economy is the deciding factor for the direction of the real estate sector in shanghai. Lets also not forget the large amount of migrants (rich and poor) from other part of china migrating to shanghai. They will continue to come as long as they see opportunity in the growing economy of shanghai. Many shanghainese also wants to upgrade their living conditions and they are also the major source of real estate demand in shanghai.

    Recently speculators is having a hard time investing as the government and banks restrict their lending to investors. I know more and more investors buying homes using 50% cash as they cannot get large amount of mortgage from the banks. Despite these measures to curb investment and speculation, the property prices continues to rise. I think the demand in shanghai is fundementally strong and relatively healthy as long as the economy of china and shanghai continue to grow.

    To top things up…the vacancy rate as well as the rental price in shanghai is on the rise. I do not think there is a buble in the short or medium term. The demand surpasses supply and will continue to be so for a period of time expecially within the CBD inner ring road area. Investor will see no reason to sell their property anytime soon.

  14. Getting money out (after the sale of property):

    You can sell in RMB and repatriate the cash in USD or Euro (perhaps any currency), provided you comply with relevant FX government and banking laws (i.e. SAFE bank et al). These basically entail providing certificates of the title, paying taxes, etc. In a nutshell, it is not a problematic issue. Consult your lawyer for specific advice.

  15. No one has mentioned the occupancy rate of the residential marrket in Shanghai. Is it above 80%?

    A big pool of unoccupied apart will be a sure sign of a bubble.

    Look at Singapore, despite a major price correction, the property market has not recovered because there’s a huge number of unoccupied apartments to keep pressure on price increases.

  16. the most recent data indicate that occupancy rate in shanghai fell to ~83% from 89%.

  17. Occupancy rates are not evenly distributed among market segments. i.e., vacancies are very high in low- and mid-priced aparments, and some areas of Pu Dong. Occupancy in Puxi in first-rate ex-pat apartment complexes can be nearly 100%.

  18. Is Real Estate cooling down? It will eventually, but the question is when?

    Shanghai’s real estate price has been booming in the past few years, make it one of the biggest real estate bubble in the world (70% of the world real estate have some sort of bubble exist). However, we have to look at this issue to two ways.

    First, real estate is becoming the key investment vehicle in China. As China does not have a complete financial market, people in China could not have many investment options(such as hedge funds, porforlio management). Moreover, China has a very unstable and not yet healthy stock market. Therefore, real estate investment is become one of the most profitable and “only” investment options for ppl in China. In Shanghai, we can often see situation as it is really hard to buy an apt, however a fair large number of apartment in Shanghai are not lived by anyone(being used as an investment and resell for a higher price). We have to look at the fact, Shanghai is taking Hong Kong’s position and becoming the door for foreigner investors in China, more and more ppl move from outside, either other providence in China or foreign countries, to Shanghai. During recent years, as the depreciate of dollar value and possible appreciate of chinese RMB, a lot U.S. investors put their money in Shanghai real estate market, wish to make a huge profit once the RMB to Dollar exchange rate goes up, as we call this money “hot money”. These are the key factors bring up Chinese Real Estate price, especially Shanghai. The fact is, Chinese government would not appreciate RMB value to U.S. Dollar (you can look at the past history in Japan, what happened when they appreciate japanese yuan value). Later on, all these investor would draw back their “hot money”, eventually it will cooling down.

    second, the Cheif Economist in Morgan Stanley China Division predicted last year that the real estate bubble in China will only last one more year. The price to income ratio in Shanghai Real Estate in outranges. As i often question myself, will I buy an 1 million dollar apt in NY? Of course not. And in Shanghai, it is virtually impossible to get an apt under one million yuan with a not bad location. For residential purpose, no matter how many ppl move to Shanghai, the supply will be greater than demand and the real estate price will be cooling off. Also, Chinese Banks are afraid the burst of real estate bubble in the near future, create more NPLs issues in the bank and the big four state owned bank has been request the government to control this unstable real estate market. With the recent regulations, use real estate as an investment has been more strict controlled than before. This is also part of Chinese economic soft landing plan.

    I would say for the year of 2005, the real estate price in Shanghai will still be booming, however year 2006 will be a turning point year, when China fully regulated by WTO and opened up its financial markets. I would predict in the first quarter of 2006, the real estate price will start to drop in a modest rate.

    welcome for comments and question.

  19. Is Real Estate cooling down? It will eventually, but the question is when?

    Shanghai’s real estate price has been booming in the past few years, make it one of the biggest real estate bubble in the world (70% of the world real estate have some sort of bubble exist). However, we have to look at this issue to two ways.

    First, real estate is becoming the key investment vehicle in China. As China does not have a complete financial market, people in China could not have many investment options(such as hedge funds, porforlio management). Moreover, China has a very unstable and not yet healthy stock market. Therefore, real estate investment is become one of the most profitable and “only” investment options for ppl in China. In Shanghai, we can often see situation as it is really hard to buy an apt, however a fair large number of apartment in Shanghai are not lived by anyone(being used as an investment and resell for a higher price). We have to look at the fact, Shanghai is taking Hong Kong’s position and becoming the door for foreigner investors in China, more and more ppl move from outside, either other providence in China or foreign countries, to Shanghai. During recent years, as the depreciate of dollar value and possible appreciate of chinese RMB, a lot U.S. investors put their money in Shanghai real estate market, wish to make a huge profit once the RMB to Dollar exchange rate goes up, as we call this money “hot money”. These are the key factors bring up Chinese Real Estate price, especially Shanghai. The fact is, Chinese government would not appreciate RMB value to U.S. Dollar (you can look at the past history in Japan, what happened when they appreciate japanese yuan value). Later on, all these investor would draw back their “hot money”, eventually it will cooling down.

    second, the Cheif Economist in Morgan Stanley China Division predicted last year that the real estate bubble in China will only last one more year. The price to income ratio in Shanghai Real Estate in outranges. As i often question myself, will I buy an 1 million dollar apt in NY? Of course not. And in Shanghai, it is virtually impossible to get an apt under one million yuan with a not bad location. For residential purpose, no matter how many ppl move to Shanghai, the supply will be greater than demand and the real estate price will be cooling off. Also, Chinese Banks are afraid the burst of real estate bubble in the near future, create more NPLs issues in the bank and the big four state owned bank has been request the government to control this unstable real estate market. With the recent regulations, use real estate as an investment has been more strict controlled than before. This is also part of Chinese economic soft landing plan.

    I would say for the year of 2005, the real estate price in Shanghai will still be booming, however year 2006 will be a turning point year, when China fully regulated by WTO and opened up its financial markets. I would predict in the first quarter of 2006, the real estate price will start to drop in a modest rate.

    welcome for comments and question.

  20. hi , i just plan to live in shanghai for long time , so thinking of buying house in pudong ,with cash in hand around 200,000 i think i can borrow another 400,000 from some bank to buy small one room apartment{50-70 sq mtrs} , anysuggestions as to which porperty would i be able to buy in such budget{600,000}?i a in no hurry to move in so can buy projects which are under construction.

  21. Hi,

    first, I want to say that I love this thread. It’s both entertaining and informative. I’ve been looking into buying a place in Shanghai, and the prices are just looking insane.

    First, I want to answer sherry’s question: I hope you’re talking about 200,000USD; if you’re talking about RMB, you’re out of luck.

    A few not-so-random thoughts:

    – yes, a lot of people come to Shanghai to find work, but these people are Chinese and poor, and cannot afford any of what we are talking about here. I don’t believe that there are this many rich people in Shanghai, or that the expat community is large enough to support these price levels (from a rough calculation, about 1% of the population is expat, and I don’t even believe most of them can afford to buy anything in Shanghai, at least not the ones I know). So I still don’t understand who’s buying!

    – the quality of life in Shanghai is nowhere near any other cities mentioned in this thread. The pollution level is very high (compared to US/European standards), the infrastructure is lacking, the opportunities for quality entertainment are very low (maoming lu was fun only a few times…), the education received doesn’t compare to what you’d get in the US or Europe, the salaries are low, and from what I’m seeing, the expats that are here don’t stay very long. In short, I don’t believe foreigners buy and move to Shanghai in large quantities.

    – I found the following data posted by AP interesting, and I’d like to know where you found it:

    House purchased by foreigners: 4%

    House purchase by individuals from other chinese provinces:15%

    House purchased by Shanghainese: 81%

    ~75% of shanhainese owned their house.

    Let’s say this is true, with an average salary of (about) 3,500USD/year, you’ll have to explain to me how the locals can afford appartments easily going for $200,000USD.

    – A lot of people have compared this bubble-to-be to the one in Bay Area, and I say it can’t. The bubble in the Bay Area was “justified” by salaries going up, by engineers getting rich overnight with IPOs; these people could afford to buy (until the stock market crashed, and we all know what happened): the real estate market was fueled by the stock market. Here, there is no such thing: no stock market, no locals getting rich, so I’m “speculating” that when the bubble burst, it’ll go down much harder than in the Bay Area (someone compared to HK, I don’t know anything so I can’t compare, but apparently the situation looks similar to the one in Shanghai: speculation, and not occupation)

    – I just found this interesting article, I like it even more because it goes my way, answers quite a few of my questions/misunderstandings about the Shanghai real estate market, although it scares me a bit… I hope that it won’t be as bad as they seem to imply: www dot financialsense dot com/editorials/arsenaultrubino/2004/1022.html

    – another data point that this article made me think about is the issue of mortgages… China is just a big Wild West of lending right now. I’m hearing every day of people taking up many of them to buy as many properties as they can; it just like a big pyramid scheme that’ll collapse as soon as the bank realize that noone can repay the mortgages and that it (the bank) is taking on all the risk.

    I guess I’ll rather stay on the sideline and miss out right now; the risk doesn’t match the reward to me.

  22. hi yan and others , i am so sad to learn that my all years saving is worth nothing in shanghai property market , but some of my friends told me 10,000 rmb for a sq mtr is possible in some pudong building but only in new projects who might take another 1 year to deliver,,,i am looking for 50 to 60 sq mtr that makes 500,000 to 600,000 rmb for totall price so i “dreamt” of 30 % downpayment {200,000 rmb} and balance getting finance from bank and then can pay monthly installment almost equal to my rent fee{ around 3000 rmb for 60 sq mtr down town apartment wher i am living now},,,so is there really no apartment meeting my so tight financial situation or i should stop dreaming?

  23. Hi Sherry,

    yes, you can easily find something for 10,000rmb/sq.m.; the farther you go from the center, the lower the price (except maybe in some areas of Pudong, regarded as nice by some foreigners, and as boring by the others ;)

    If you do your homework, you should be able to find something that fits your budget. That’s also true for metro stations: if you’re willing to walk a bit, the price will be lower. Near the LianHua station in MinHang for example, things go for 10 to 15,000/sq.m right at the metro station, and under 10,000/sq.m if you walk 10-15 minutes.

    good luck.

  24. thanks yan , i really needed that morale booster to keep on with search , any good suggestions, for making search easier? i can walk 10 minutes from any metro station on line 1 or 2 or pearl line , so if any one knows such apartmentbuilding now, of small size{upto 60 mtrs} and around rmb 10000/sq mtr pl help me

  25. Sherry

    If your budget is RMB 200,000 (for deposit), I would highly recommend considering renting. The rents (for apartments of that kind of value) are extraordinarily cheap, and given the low intrinsic value and location of properties in that price range you could find it hard to get good mortgages, and risky re: appreciation potential.

    Quite a nice discussion going on here. From reading here, one of the commonalities I have noticed among the ney-sayers is the commentary on the market as a whole, without considering market segments. Also, horizon, leverage, and occupancy (i.e. reliability of cash flows) are critical factors in real estate, and often overlooked.

    There are many value-drivers that suggest Shanghai will increase its value in the “long-term” (I mean 5 years or so). For example:

    o Shanghai is China’s cultural and financial hub, with a growing population of already more than 18 million people

    o Chinese government’s determination for Shanghai to be China’s financial and economic center (seemingly striving to replace Hong Kong) – accordingly, its massive investment in urban renovation projects and strong support of real estate developers

    o World Trade Exposition in 2010 in Shanghai

    o Double-digit growth in GDP in each of the last 13 years – expected to continue well into the future as it outpaces China’s economic growth by 2 to 3 percentage points per year

    o Ex-pat population expected to triple or more by 2010

    o Comparatively low price of luxury apartments (to Hong Kong, Tokyo, Seoul, Taipei, etc.) – Shanghai is 1/2 to 1/5 of the prices, relatively speaking.

    There are many others. The upshot is that there is a lot of growth potential (stress that word), and there APPEARS to be every indication of not only China’s continued growth but moreover Shanghai’s.

    I think the fear is caused by a couple things: 1) history has many stories of bursting bubbles, and certainly Shanghai’s real estate has been appreciating at an unreasonably high level over the past few years, and 2) general fear of volatility. The latter flows from the former.

    However, volatility is not necessarily a bad thing. If, as an investor, you are holding options, for example, volatility is exactly what you want, as it increases the value of the option. If on the other hand, you are holding equities (or in this case, you own real property), volatility is risky ONLY TO THE EXTENT THAT you are over-leveraged AND have cash flow problems AND (or thus) your horizon is too short. I.e., in those cases one might be forced to sell in a down market (whereas I will be continually buying with low/safe leverage and holding for several years, and thus dollar cost averaging and benefiting from down markets as well as up markets).

    Essentially what I am saying is that I believe strongly in Shanghai’s 5-year growth potential, and though I expect bumps along the way (i.e. I don’t expect it to growth smoothly and steadily) this is not a problem for me since I am not trying to flip properties in the short-term. Therefore the risk (from the market) I have is the risk of lower returns in the case that I have to hold on longer than planned. Likely I will still profit, it might jsut take longer than expect if things don’t go as planned. That’s a pretty good downside compared to many investments with not even nearly the upside potential of Shanghai’s luxury real estate.

    Cheers,

    David

  26. thanks david , iam currently renting one apartment {55sq mtr} near ppl sq{5 min walk from xinzha road metro staion}. i am paying 2700rmb as rent fee and i have cash in hand 200,000 rmb , i am thinking to put this 200,000 rmb as deposit and around 400,000 rmb get as mortgage , so i will end up paying around 3000rmb {a little more also no problem} as installment ,,and i will have equity on my deposit and monthly payout ,,,that means no need find new apartment everyyear no rise in monthly expense and get some equity ,,just by bearing some inconvenience of walking 10 {instead of 5 minutes from subway} and living few more stations away from ppl sq….; am i dreaming too much?,,actually apartment i stay is also for sale around 13000-14000/sq metre , so i think 10000 is possible too!

  27. Sherry

    While RMB 10,000 may be possible, you are not going to find a place with good intrinsic value at that price. Therefore, it will be the most subject to loss in value if the market moves south. If you need to sell and it is a down market, you could actually end up having to PAY to sell your house (i.e. your mortgage balance could be higher than the value of your house). That is why I say it is risky.

    Overall I am a big believer in renting, esepcially when rents are so cheap. Contrary to what many people feel, it is a GREAT use of money and not a waste. It gives you flexibility and you don’t have to worry about the market or fixing broken things or other problems of ownership (title issues, legal issues, building problems, etc.). If you are renting and there are problems, you can just move. And you are free to use the money you would otherwise have to use for down payment for other purposes (including investing).

    As an investor I have totally different approach to the market (I buy very high-priced unit that are less in supply and higher intrinsic value), I a lot more capital, and I have the ability to “weather out the storm” (i.e. to hold on during a bad market). As an individual, your job might change, you might find a husband and want to move in together, you might want a nicer place (upgrade), or you could need your cash for some emergency, etc. It’s a really different situation.

    However, owning of course is the ultimate dream for many people, and sure – it can be great too! You get your own place and you can build equity and make profits as the property appreciates.

    If you are intent on owning, I would advice you to consider two things:

    1. I would be prepared to live in the place you buy for at least 5 years, in not longer. In that case you could withstand a bad market if it occurs.

    2. I would only do it if I had sufficient cash in the bank as reserve in case I needed money for other purposes. In your case, I would have AT LEAST another RMB 200,000 saved first.

    I’m quite a bit more cautious than most people (as an individual, not as an investor), but that’s my thinking regarding your specific situation. Hope it helps!

    David

  28. hi david , thnx for such a great insight, but my situation is different , i am doing a small business with my capital {200k us.} without which my kinda business cant be done, i have profitablity around 2% monthly net after expenses {3000 rmb of which is rent } ,,,so i want to put my half years income as down ,{thus not decreasing on capital} and then continue as i am now just that this 3000 rmb now i pay to bank will be adding to equity, ireally dont bother if it increase in price ,just the price should not fall :),,i will save money even if it remains stable..about another 200,000 rmb its not problem for me as in my home country i have more biggeer business and have lot of equity there,,,,but down side is today i called an agent and asked if they have any small property {arnd60 sq mtrs}in price range of 10000 rmb,,he quickly said “forget it ” and hung the phone ,,,so i am in such a fix ,,i know my plan can work i just cant find where to look for apartment

  29. Sherry – your situation doens’t sound any different to me than I imagined.

    Bear in mind that the market can go down – it’s entirely possible! And many people are thinking there’s a bubble right now, which will burst. If so, the kind of place you are looking at will be hit the hardest (i.e. will lose the most value).

    So, the fix you find yourself in may be a good thing after all :)

    My advice – focus on your business and consider RMB 3000 as a very reasonable living expense.

    G-luck,

    David

  30. and i thought small properties are hit least as they are easy to sell{and hard to find} ,,and easy to keep!

  31. I JUST RAN ACROSS YOUR WEB SITE IN ERROR BUT DID TAKE THE TIME TO SCAN THRU IT.

    VERY INTERESTING

    I HAVE A 53 LOT MOBILE HOME PARK AND 18 ONE BEDROOM APARTMENTS FOR SALE IN

    ROXBORO, NORTH CAROLINA (USA) FOR SALE.

    BILLY WILLIAMS

  32. Sherry

    You gotta consider supply and intrinsic value. Small, cheap properties typically are the hardest hit during recessions (they are usually easy, not hard, to find, and have very little intrinsic value).

    Best,

    David

  33. david thnx for reply , but if its easy why cant i find one?

  34. Sherry – I don’t know what else to tell you. You can easily find something for that price or less, as long as you don’t expect it to be a palace in the middle of downtown Shanghai. If your primary goal is just to own a place then buy what you can afford.

  35. Wang JIan Shuo, I found your Blog interesting and I will keep coming back.

    I think the property market in Shanghai will sooner than later goes down. But I do believe it is not going to be a deep dive – it will be a long process: and it has already begun.

    There are rule of thumb for real estate investment: 10 years. Now if you look at the rent they are getting for their apartment. It does not adds up at all.

    The question is When. If you are a value investor, you will probably get out of the market ASAP. For, whatever goes up, comes down.

  36. I disagree with Scott (on most accounts). I will explain.

    “I think the property market in Shanghai will sooner than later goes down. But I do believe it is not going to be a deep dive – it will be a long process: and it has already begun.”

    === The property market see a slide in price in the near future, especially with the new policies having gone into effect. however, I don’t think it will be a long process (unless more dampening policies are put into place). Overall, the value drivers for Shanghai are very strong, and the prices are still reasonable, relatively speaking to the cost of living.

    There are rule of thumb for real estate investment: 10 years. Now if you look at the rent they are getting for their apartment. It does not adds up at all.

    === This is also true. But as he said, it’s a rule of thumb. Rules of thumb are, by definition, just a way of ballparking and thus ignore all other factors. I.e. they are ignorant. Investors need not be ignorant, and if you do the research you’ll most likely conclude that the long-term prospects of SH’s real estate market are strong.

    “The question is When. If you are a value investor, you will probably get out of the market ASAP. For, whatever goes up, comes down.”

    === First of all, a “value investor” is not a homogenous thing. I.e. people have different pasts, different objectives, and different horizons. Imagine if you just bought property 6 months ago. Would it be a good time to get out? Not if you believe in the 5-year prospects, as I do, and that is your horizon. And if you didn’t get out before June 1, now would be a bad time for anyone who bought 140sqm+ within the last two years. This sweeping, general statement is not good advice for most investors.

    === Second of all, “what goes up comes down” is simply myopic. Even if it were true, it speaks nothing of horizons or long term. It’s a ca-sino (had to break this word up to pass the screen) mentality that bears no basis in fact but rather in superstition.

    — Finally, no one has a crystal ball here, so any specific speculation about the market is just that – speculation. So, for what it’s worth, I speculate that the market will soften in the next few months, and then, pending no more new policies that dampen the market, it will once again climb, perhaps not steadily but climb overall, during the next 5-10 years. All the evidence points that way, I believe.

    — If you believe otherwise, I’d encourage, for the benefit of all of us, you to share your insights based on facts and research, rather than superstition or “divine intuition”. Thanks.

  37. Curious if anyone has further opinion on buying villas vs. apartments vs. lane house? I just looked at some lane houses and think that if there is a correction in Shanghai real estate, lane house will be able to withstand the correction more than apartments and villas based on supply. Any thoughts? Also, wonder if anyone has thought about buying lane house, what are the pitfalls to watch for (like gov’t plan to tear it down, etc.?) Thanks.

  38. re: Lane houses (and old houses), much harder to get financing (mortgages), tax situation is more complex, and in my opinion they are priced too high (compared to new developments). Also, often the neighborhoods suck (local Chinese squatters) and there are no services. They can do well (for investment), but it’s much harder to make it work. My suggestion re: supply is choose your location wisely. Remember the three words of real estate — location, location, location.

  39. It is a safe to buy old house and lane house at least it;s price wont drop so much when bubble breaks.

  40. If you look at the bigger picture there is going to be nothing but a long term rise in the market. Maybe not a time for short term gains but long term definately.

  41. There may be a slow down which means there may not be potential for short term gains but over the long term the potential is huge. The prospects for shanghai and development are great

Leave a Reply

Your email address will not be published. Required fields are marked *