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Guest Post: The Two Keys to Understanding China's Housing Bubble

Wednesday, September 1, 2010, 9:50 PM
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by Charles Hugh Smith

This post is one in a series from respected guest commentators while Chris is on vacation with his family & working on his new book. Chris returns next week; enjoy the fresh perspective in the meantime.

The Mainstream Media in the U.S. has presented two basic approaches to understanding China's real estate bubble:

  1. There is no bubble in Chinese real estate, as demand for housing is so vast that it will soak up all the tens of millions of flats that have been built in the past decade.
  2. It is a bubble, and it's fueled by the same dynamic as the bubble that expanded and popped in the U.S. and elsewhere: easy credit and speculative lending encouraged by government policy.

Approach Number 1 has little to support it.  Recent on-the-ground surveys found that half of the flats in Beijing and Shanghai are empty (or the occupants prefer living in the dark, night after night), while reports based on utility accounts found that there are roughly 65 million vacant apartments in China—the bulk of which are presumably held for investment.

Approach Number 2 has some merit, but it misses the key drivers in the Chinese housing bubble, and thus it is ultimately misleading.

 

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