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Is the Real Estate Business a Threat to China’s Economy?

China Economic Net published an article on November 28, 2009, stating, “This year, the rapidly soaring housing prices and the huge waves of speculation have caused dire concerns and worries about a real estate bubble from all walks of society.” The article explains that real estate investment counts for a larger and larger portion of the recent real estate market, a development that could threaten China’s economy. Whether the real estate industry can develop steadily in 2010 without the bubble bursting will be an indication of the future of China’s economy. Following are the major points from the article.

The director of the Office of Economic Development of the Economy Research Institute, China Social Science Institute, Xianrong Yi, commented half jokingly, when Stock Daily interviewed him, “Housing prices will not drop even if we build houses using soil from the moon. The current market is a hyped up market.” The general manager of Lianda Sifang Real Estate, Inc., Beijing, Shaofeng Yang, said, “The majority of the new buildings in Beijing were sold out even before the construction was completed. However, only 30-40% of the apartments are occupied, even though it has been two years since construction was completed. It would be really good if 50% had residents.”

A phenomenon exists in the real estate market. On the one hand, a group of people are waiting in line to purchase houses; on the other hand, the vacancy rate is getting higher and higher. Almost all the new buildings are dark when night falls. In the area outside of Wuhuan of Chaoyang District, Beijing, a building with 2,000 apartments sold out a long time ago. However, only 30% of the apartments have residents. The realtor in the community said, “The majority of the apartment buyers are investors. There are relatively few real residents.” The same situation exists in Shenzhen City and Shanghai City. In many of those communities, the rate of occupancy is less than 50%.

According to international convention, it is normal if the vacancy rate is 5% to 10%; it is risky if the vacancy rate reaches 10%-20%. If the vacancy rate is over 20%, there is a serious overbuilding of commercial housing.

Xin Zhang, the CEO of SOHO of China also indicated that, in Manhattan, people would feel that the end of world was coming if the vacancy rate reached 10 to 15%. However, in Pudong, the eastern part of Shanghai, the vacancy rate is as high as 50%. Nonetheless, new skyscrapers are still being built.

Bin Yu, the director for the Macroeconomic Research Department of the Center for Development Research in the State Council, stated that real estate accounts for 6.6% of China’s GDP and a quarter of all investments. Sixty different industries are directly related to real estate and have become the heart of China’s economy. Once the real estate industry has major problems, the industries that depend on real estate, such as the production of reinforced concrete and the middle to large-scale enterprises that invest in real estate will suffer major damage. That may induce a major loss of capital and the destruction of China as an economic entity. More seriously, those banks that loan large amounts of money to real estate industries will have trillions of bad or dead accounts, which will ruin China’s financial industries. …

In July 2004, Xianrong Yi warned, “We should carefully protect ourselves from the situation where real estate threatens China’s entire economy.” At the time, he pointed out clearly that the real estate industry has been bound together with the economy of the whole country and with people’s personal interests. It is threatening China’s economy. He used the example of Japan in the 1990s and reminded that once problems occur in the real estate industry, the economy of the whole country will quickly go into a period of crisis. From Bin Yu’s analysis, it can be seen that five years ago, Xianrong Yi, unfortunately, made the right prediction. It is hard not to associate the current situation of China’s real estate market with the breaking of the real estate bubble in the early 1990s in Japan in the last century.

Some economists hold the view that, just like Japan, the experiences of many places have proved that it is very inappropriate and unsafe to use real estate as the major industry to support the economy. The high housing prices can directly affect the expenses in other areas of life and, therefore, affect the overall feeling of happiness. Just as Xianrong Yi pointed out, when real estate becomes “hijacked,” for luxurious consumption forced on people’s livelihood, then economic development based on real estate is absolutely irrational.

Xianping Lang once stated to the media that, “None of the big countries dares to make real estate the major industry. If all the money went to real estate in order to create a high GPA, how could people spend money to buy other things? If none of the people in the country work in the manufacturing industry, and everybody plays the stock market, where can the country go?”

As the housing prices keep soaring, the average people have to pay more to buy a place to live. The anxiety caused by being able to afford a place is getting more and more intense. The soaring prices directly affect people’s choice of expenses, while anxiety affects people’s expectations in spending their money. Those two factors are the major causes for the prolonged inactive internal markets in China. When all of your savings throughout your life are spent to buy an apartment, how can you expect people to spend money on anything else? That is why we can say that the high housing prices have seriously affected the recovery of the economy in China. To increase GDP through real estate is like drinking poisonous water to quench your thirst.

In Beijing, Shanghai and Shenzhen, apartments close to the metropolitan areas are all above 20,000 yuan per square meter and those in the cities are 30,000 yuan. An average family has to spend at least 4,000,000 yuan in order to by a place that is 120 square meters. According to the investigation of Stock Daily, the apartments in the Lujiazui region in Pudong of Shanghai City are priced at 70,000 per square meter. Every suite costs more than tens of millions of yuan.

According to the report published in a Reference News article, “The Korean Finance Group Bought the AIG Building in New York City for a Low Price,” the purchasing group of Young Woo & Associates bought AIG’s building in New York City for the price of $150 million, a unit price of $100 per square foot. That is less than $1,077 per square meter. That is to say, Chinese can buy landmark buildings in Manhattan for the price of 7,300 yuan per square meter.

According to the statistics of the U.S. Ministry of Commerce, the average price of a house in the U. S. is $200,000, which is 1 million yuan. In addition, the so called “houses” in the U.S. are actually “villas” in China, which have a garage, a yard and a swimming pool. The well-known commentator Hanbing Shi once questioned, “What kind of house can you buy for 1 million yuan in China?”

A government official in Ningbo City once gave out the information that in the recent two months, 18 more real estate companies emerged in the city. They were all once in manufacturing. Due to the inactive market in the manufacturing industry, they used all their money to buy high-priced land. The reason of course is the amazing profit in the real estate market.

From this year, under the situation that the national GDP was 30 trillion yuan in 2008, in order to stimulate the internal market, the major banks loaned out an amazing amount of money, about 10 trillion yuan. Most of the money went to state owned enterprises. After obtaining the money, they then purchased land. Therefore, these “landlords” emerged one after another. For example, the land at No. 15 Guangqu Road in Beijing, land at Changfeng in Shanghai, and at Tianchu No. 22 in Shunyi, are all owned by state owned enterprises.

In addition to the many people who buy and sell houses for profit, the number of people who bought houses to receive fixed investment income is also large. How long does it take to get the money back if the house is rented out? A researcher at the Yiju Real Estate Research Center in Shanghai told Stock Daily, “The 100-square-meter houses in the center of Shanhai City rent for 7,000 yuan a month. You need to pay about 4-5 million yuan to buy one. Therefore, if you want to get your money back through rent, you have to wait about 60 years. Furthermore, that is not an example of the recent low rental rates in big cities in China.

In the Rainbow City Community in the South Sanhuan of Beijing City, a 100-saqure-meter second-hand apartment is listed at 1.6 million yuan. The real estate agent for the community told the reporter that when those kinds of apartments are on sale, they can definitely be sold within five days. However, the rent for such an apartment is only 2,000 yuan a month. That is to say, the owner cannot get his money back until 800 months later, which is 66 years.

According to an investigation by the Market Research Department of Meilian Real Estate, Inc., since November 2009, the rental and selling ratio has broken the historic record of 1:150 and reached 1:525. Some regions have reached 1:700. However, the ratio was 1:400 in 2008. The increment is 25%, which does not include the newly built houses that can be rented. The vacancy rate has also been increasing.

The international standard for a reasonable rent and selling ratio is below 1:250. That means if you rent the house out according to the price for the current market and you are able to get your money back within 100-230 months (10-20 years), the house is not too expensive, and buying a house is a good investment.

However, when the housing price is soaring, wealthy people buy high priced houses not only in order to maintain the value or as an investment; more and more regular employees have joined a group that is “buying houses to make money.” The wealthy people who buy houses to maintain the value do not care at all whether the rental fee is high or low. The profit gained through the rising housing prices also makes more and more average people become negligent about the rental price. All people across the country have joined the trend of buying and selling houses. …

According to the latest statistics on Beijing Real Estate Trading Management Net, since November, the closing rate for second-hand houses has broken the record of 20,000 units, or 1,031 units each day on average, which is a sharp increase compared to the 600-700 closing rate some time ago. If predicted according to the current trend in 2009, the total trading rate of second-hand houses in Beijing in 2009 will break 270,000 units, which is greater than the sum of the rates of the three previous years from 2006 to 2008. Zhang Dawei, the general director for the Market Research Department of Meilian Real Estate Inc. indicated that it is dreadful that a “need for purchasing a house out of terror” has emerged in the market in just a short period of time, due to people’s worries about an end to beneficial government policies and soaring housing prices. Those people have made the housing prices soar, together with those who have invested in houses in Beijing. Furthermore, people have become more and more emotional as the housing prices have become higher and higher. Currently, those two kinds of needs in real estate are counted as over 50% of the market. In the U.S., the average price of a house is $200,000, which is a little over 1 million yuan and is actually the villa that Chinese inside China refer to. However, in Beijing, Shanghai and Shenzhen, it costs at least 3 million yuan to buy a house of similar size that is close to the city.

[1] China Economic Net, November 28