This seems to have been lost against the export-rise noise: May CPI and PPI figures came out recently (3.1%, 7.1% respectively) making an interest rate hike by the central bank appear inevitable, probably in late June or early July. This will affect anyone who’s purchased a flat using a mortgage – given property bubble concerns – how this plays out could be interesting. It’s my understanding that local governments are also exposed to interest rate hikes in the form of various types of investment vehicles meant to supplement expenditures (from FT Alphaville):

LGFVs are conduits, like the Special Investment Vehicles (SIVs) were for western banks, used by local government to borrow and spend on infrastructure and other projects (like real estate).

Local Chinese governments share relatively meagre incomes from the country’s central tax pot, yet they’re charged with some pretty huge infrastructure and stimulus projects. What’s more they’re unable to run deficits, or get bank loans, or issue bonds without special central authority permission.

Enter the LGFV. Using these conduits, local governments are able to finance their projects in a rather roundabout way, borrowing money from banks in exchange for some collateral –often local land.

The scale of local borrowing is unclear; some put it as high as 150-160% of GDP (combined with national debt) which puts China comfortably in developed world debt ranges.

“… what impact will banning third-home-purchases on credit have on the world’s second largest economy? If that’s what China is relying on, there are some serious structural issues.” Though I understand the situation is complex, and metrics applied elsewhere may not be applicable in a context like China, here’s some more evidence for the ‘bubble’ crowd: Zhao Xiao, a professor at Beijing University of Science and Technology, estimates that, among home buyers, at least 40-50% are doing so purely for investment purposes. He’s quoted in this article, citing a survey which examined residential energy usage statistics, and concludes that:

• There are at least 65 million empty apartments in 660 cities throughout China.

• This translates into (assuming 100 square meters per apartment) 6.5bn square meters of unused space.

• That’s enough to essentially add three more Shanghais to the country without batting an eyelash.

• The amount of space, the report notes, is equal to 7.7 times the amount of property sold in 2009, and 11.3 times the amount of new space constructed.

If this is accurate, it would seem that orgies of new construction all over the country are merely a drop in the bucket, when examining aggregate, unused space. There’s a good long term argument that this space will be soaked – 65 million units is enough for, say 190 million people, which is about equal to various estimates of China’s long-term floating population of migrants. The question of whether or not they’ve settled within the cities is extremely relevant, in determining how fast this excess space will be used up. There does appear to be considerable retail demand for decent living space, though price currently deters these people from buying into nicer properties. If incomes continue to rise, however, it’s simply a matter of time until there’s a break even point.

That said, the break even point could be a decade from now, and if structural investment does not shift, the housing boom seen in the last decade may very well have represented a tremendous waste of resources.

赵晓表示，根据国家电网利用智能网络在全国660个城市的调查，发现大约6540万套住宅电表读数连续6个月为零。“以每套住宅平均100平方米计算，65.4亿平方米的空置商品房相当于2009年住宅竣工面积的11.3倍，这相当于2009年住宅销售面积的7.7倍，说明中国当前住房空置率远比想象的严重，也说明一些有钱人正用大量资金在房地产市场上兴风作浪，不断激化社会矛盾，炒房大军明显已经成为加剧我国房地产市场疯狂的毒药。”

The State Council just issued new regulations, in an attempt to curb real estate speculation and rising property prices. As of today, major property developer stocks are down about ~9%, with the broader index down approximately 5%. Conservative estimates coming from brokerages indicate that, if none of the regulations are altered, property prices will fall about 30% by the end of the year. Details on the regulations: down payments on first homes was raised from 20% to 30%, on second homes from 40% to 50%. Loans for second homes must be at least 110% of the benchmark interest rate (first homes can still be purchased with a 20-30% discount, so long as the down payment is 40% of the purchase value, making the new rules even more punitive than they seem at first glance for anything but a first home purchase). Loans for third home purchases have been completed suspended.

These rules were obviously meant to address concerns that many were using real estate purely as an investment tool, buying apartments and having them sit, empty, without even putting them on the rental market. Having written previously about concerns of a housing bubble, the really interesting thing will be to see how much of a recession this move precipitates (caveat: the term “recession” will be tossed around here if year over year growth approaches 8%). The high GDP numbers, and recent real estate price climb certainly motivated this move – it’s not often one sees regulators poking at bubbles, especially when the consequences could be so problematic. In the long run, constantly rising house prices would have been very damaging for social stability, so it’s a positive signal that authorities are trying to be proactive. This may end up illustrating, however, how very difficult it is to pop asset bubbles, assuming they can even be accurately identified. From the outside looking in, it’s fascinating, and how things play out over the next twelve months will shed light on several open questions: the composition of a lot of recent infrastructure investment and actual levels of urbanization/retail demand for housing.

Meanwhile, well-off poor local friends are losing money hand over fist, when all they wanted to do was settle down and marry a nice lady. Boo.

Having visited home after my research grant, and arriving back in Shanghai on a Friday night, scheduled to start work on Monday, I had only 36 hours to find an apartment. I decided to take the first place that met a very broad set of requirements, rather than live in a hotel for a week. This time around I had more time to conduct a proper search. Having become familiar with the process of apartment hunting in China (in Wuhan and Shanghai at this point), I thought I’d document the steps for future reference.

90% of the time, if you’re looking on your own for an apartment (or property) in China, you will do so through a real estate agent (中介, zhongjie) company. They have lists of properties they manage, acting as middlemen. For residential rental, their normal fee is 30% of one month’s rent. It’s a good idea to check out online property listings first, Google Lifestyle (谷歌生活搜素) or Soufun (搜房). Most of the listings on these sites are also from agents, so it’s an easy way to get contact information (call, tell them where you’re looking/what price range, and they can arrange to show you a several properties).

Personally, I’ve had good luck just wandering around neighborhoods until I found a real estate company (usually something-something-房地产). Indicate that you’re looking in the neighborhood, price range, and when you want to move in. No one has really tried to take advantage of me, and white-person-premium seems to be 100-200Y per month at most. Going through a real estate agent also has the benefit that they provide contracts for you, and keep copies of them. Again, never had any problems in this regard but it seems wise to have another layer of involvement should something go wrong with the landlord.

Always get the landlord/agent to write out receipts anytime you pay for anything (handwritten notes, if signed, are legally enforceable in China) and any agreements you have about ‘if something breaks, party X is responsible.’

Timeframes: one of the major differences between apartment hunting in the US and in China are the timeframes involved. It’s normal to look for a place, and be moving in within 48 hours (this often seems to happen). There is little advantage of trying to plan a month in advance, unless you have the luxury of waiting over the entire period to find something that is ideal. Using simultaneous real estate agents is a good strategy, at least to be sure that you get a good range of prices.

In general, most apartments will come ‘furnished.’ Don’t expect heating, aside from a reverse air conditioner (it’s possible to find central heating, though it will be more expensive). Insulation is universally bad. In general, there’s a strong correlation with appearance and price, not necessarily quality and price. If the place is in a tall building, expect it to be even more expensive (not quite sure why, as the newer properties tend to have terrible sound insulation). It’s always possible to find international standards, though you’re likely to pay even a slight international premium. In Shanghai, 1 bedroom 1 bathroom 1 living room apartments seem to run 1500-3000, with the lower end being extremely far away from transport. In cities like Wuhan, 2000 will nab you a many-room palace.

My personal preference is for 2nd/3rd story places in older (1980s/90s), decaying, Blade Runner-ish buildings that are located near pedestrian markets. Since most properties here don’t have fire escapes/alarms/sprinklers, being located near the ground seems ideal from a jumping standpoint. Ground floors often have rodent problems. If you’re high up you also less safe from petty thievery (the professional lockpicks I’ve spoken with here say they always go for places on upper floors since there’s less foot traffic. I don’t really think this is a big problem, so it’s probably not very relevant).

From FT Alphaville, more information about price changes in Chinese property in 2009. One chart depicts a three month moving average, demonstrating the speed of 2009’s price increases; and another that breaks it down by city. Price increases have been heavily concentrated in coastal cities (200% increase in Shanghai, 400% in Guangzhou). According to CRIC’s data, Wuhan’s housing prices fell during 2009. I recall some stories about real estate agents in Wuhan offering 50% discounts at the end of 2008, something that seems unimaginable given the long waiting lines that appear whenever new property goes on sale in Shanghai.

One of the counter arguments to the notion that China has a rapidly growing property bubble: a majority of the country’s 1.3bn people wants to move to the coastal cities (which account for about 5% of the total national population), and therefore use of averages (for example, years of average income required to purchase a flat in the city) that are appropriate in other contexts lead to skewed results. Examining only the top 5% of Chinese earners, for example, Shanghai land prices might not seem that outlandish. Anecdotally, this seems at least partially true: it’s difficult to describe the magnetic pull that the eastern metropolitan areas exhibit, despite their increasing unaffordability for most mainlanders.

Among mainland youth, I’ve not come across a single example of someone that did not have their heart set on going to one of the three major cities (Beijing, Shanghai, Shenzhen). This seems crazy given the living expenses that one has to deal with, along with (presumably) more competition for the career-track jobs that would make resettlement worthwhile. Surely the positive network effects of agglomeration cannot be worth the headache of dealing with high house prices and xenophobic city-dwellers, and upon first glance this slavish devotion to migrating east seems like another entry in the long list of mainlandgroupthink.

Puzzling until the actual extent of wage differentials became clear: GDP/capita in the large cities is around USD11,000, with second-tier cities about 50-70% of that. Within the U.S., metropolitan wage premiums are hardly so significant (potentially aside from Washington D.C., which sticks out like the governing municipality of a banana republic when examining US income data depending on how you slice it). I haven’t been able to find good information for the distribution via age/education levels, though anecdotally it seems to hold across the distribution.

This is worth noting: real-estate stocks (property developers) tanked in the last week and a half, likely the result of government announcements that they are planning to put the kibbosh on “real estate speculation.” There have been several policies enacted recently, such as a tax on secondary sales (which probably makes the affordability problem much worse, and will impact speculation only insofar as buyers have a limited time horizon). The national congress convenes in March, and the expectation seems to be that more incoherent contradictory nonsensepolicies issued then will address the issue. Until then, uncertainty is difficult to price. (Source: 大智慧, data retrieved 01.29.2010).

The supreme ‘going native’ move would be to marry a Chinese lady. Normally this seems like an inexpensive option for language immersion. Potentially not so price neutral though, since housing is expensive here, as this blog post elucidates: “House Prices are so high that even foreigners won’t dare to marry Shanghai girls”. The post concerns an anecdotal account of someone’s neighbor’s daughter who fell in love with a “young fellow” from Holland, but the two were unable to get married because he couldn’t buy a house. The following scene occurs after the young man reveals to his lady-friend’s parents that he cannot afford to buy a house in Shanghai (translation by me, tilted towards literal):

… The Young Dutch Fellow was embarrassed for being so poor, but it was finally apparent to the Shanghainese mother-in-law, that the young lad wondered if it would be alright to use a mortgage to buy a house. Her expression became livid, a foreign son-in-law buying a house would only happen once, how could he get a mortgage? After saying that he lost face – he was just a poor foreigner! The mother-in-law didn’t answer, and this Young Dutch Fellow Little Foreigner was unable to do anything, he was helpless as the time drew on, and the mother-in-law was unable to bear it, and started spreading gossip among all the neighbors everywhere about the “poor foreigner.” The father-in-law was afraid that the son-in-law would lose face and so explained: “It’s not that the foreigners have become poor, it’s that Shanghai house prices are high! They have already surpassed international levels, so even foreigners don’t have options.”

荷兰小伙子囊中羞涩的窘态，终于被上海丈母娘看出来了，因为小伙子语焉不详的试问，好不好先交个首期按揭买房。上海丈母娘脸色铁青，老外女婿买房都是一次过，哪有按揭的？说出去多丢人啊，那不是嫁一个穷老外了。丈母娘没答应，这荷兰小老外真没辙，磨磨唧唧的没办法，时间一长，丈母娘忍不住了，到处和邻居街坊说，张嘴闭嘴就是“穷老外”。老岳父怕给女婿丢脸，赶紧圆场说：不是老外变穷了，是上海的房价太高了，这超过国际水平了，老外有什么办法。

There seem to be some other issues here, since there’s no particularly delicate way to say: “Oh… I’m maybe not so confident in the property regimes of your land…” or “I am maybe not so confident in the quality prospects of this city’s constructs…” (which the author addresses, noting that “prices are similar to Amsterdam’s, but there couldn’t even begin to be a comparison on quality”):

Beyond that, however, buying a house in Shanghai (except for the very outskirts) is a fool’s prospect, at the moment. Price-rent ratios / Average income-price ratios are all messed up. From a pure cost-benefit perspective, our ‘young Holland fellow’ would be much better off renting. Buuuut you have to own a place to get the lady.

The author’s point is simply that ‘being foreign’ is typically seen as a proxy for wealth (hah! Joke’s on you! We just lost all our money!) and in citing this example he further elucidates how out of control the Shanghai property market is. There are, however, two sides to every coin as one of the commentators notes:

Shanghai’s house prices continue to rise, or else all beautiful Shanghainese girls will be abducted by foreigners!!! ok!!!1

上海的房子继续涨啊，要不上海美女都被老外拐走了！！！ok!!!!1