Is the Real Estate Cooling Down? – Part II got responses. I posted the following comments to the thread that is already hot. Please forgive me to abuse the right of more control on this blog so I can post at the top of the page while others who holds different oppinion can only argue at the end of the page. :-)
Disclaimer: Don’t treat me as an expert on real estate. I am not. I just copy what I heard from the 91facai.com conference, which I think is reasonable analysis.
After collecting some information, I think it is the time we pay attention to the following factors:
It is true that when all investors withdraw money from real estate market, the bubble will crash. But in a closed economy, people have not many choices other than putting the money into real estate and will continue to put in more money. In LA or HK, people can easily and quickly move the money from one country/region to another. It is not the case in mainland.
If you want to withdraw your money from real estate, tell me, where you put your money? You cannot put it into any investment abroad. Maybe you can, but majority investors cannot. You may not consider putting it to stock market in China – fewer people believe in the stock market in China now. Do you want to put it into investment like REITS? There is no such investment channel in China 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 Chinese investors. When it happens, money will flow away as quick as possible and the bubble will crash. Before that, so many people with millions of dollars on hand have no where to invest. That is part of the reason why the real estate price raises so quickly – it is an indicator of the lack of other investment channel.
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. The annual family income to average house price ratio is around 1:6 worldwide. 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 ratio of the price of labor and the price of resources. Now the price of resources can be traded – all the goods that flows between China and U.S back and forth, 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 even higher. The secret behind it is, labor is over supplied in big cities like Shanghai and capital is also over supplied (with huge amount of money flow in from around the country) but the construction of real estate properties does not catch the speed. So the price will continue to rise.
I don’t mean the price will continue to raise forever. I agree there is bubble, serious bubble. But who cares. People only care about the bubble before and after it crashes. The most important factor for the bubble to crash is:
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. properties price will drop below current 1:12 only when the labor cost of China increase dramatically.