Is China’s real estate bubble getting out of control again?


Dec. 4 2020, Updated 10:52 a.m. ET

The bubble is back

As the below graph reflects, housing prices in Beijing have risen dramatically as China’s construction and investment have cooled. As real estate growth has declined from an approximate historical average of around 25% per year to closer to 15% the past few years, the prices in Beijing have continued to a climb once again. Wages have been growing while construction growth has been slowing. It shouldn’t be a surprise that housing prices in urban areas are therefore rising. Perhaps the improvement in the housing-related wealth effect could trickle through to domestic demand–related stocks like Baidu, Apple, and Google China later in the year. On the other hand, future credit growth to a bubbly real estate sector could eventually spell danger for China’s already troubled banks.

To see an overview of the U.S. macroeconomic recovery that could support China’s export economy, please see Must-know 2014 US macro outlook: The crack in the debt ceiling.

Will the bubble burst?

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With new properties developing slower, the current price levels in China could in fact be supported. The risk for the future of housing prices is more likely to be associated with China’s GDP growth rate slipping significantly below the current level of 7.5% per annum. Yet, with wage growth running in excess of 15% per annum, there would seem to be the case for well-supported housing prices and robust construction data. At the moment, it would appear that the real estate development-price relationship has already adjusted to a more balanced equilibrium, consistent with slowing overall growth data. This scenario would support a soft landing for China and continue to support the strong growth prospects for domestic economy–sensitive shares such as Baidu, Apple, or Google China.

With the momentum in wage growth in China, investment may cool a bit, but consumption gains are showing signs of improvement, and real estate seems to be getting a little tight. On a relative value basis, an investment in Baidu may begin to look more attractive than urban real estate if real estate continues to rise in value so quickly. In this environment, it might appear that sales of new Apple products in urban areas could surprise to the upside in 2014 as urban consumers see their real estate values appreciate. The urban wealth affect due to appreciating property values should support Apple, Baidu, and Google in the near term, though the longer term risk is that China’s banks could rein in all lending if their industrial loans face further declines in credit quality.

To see how the rapid growth in China’s wages should continue to support Baidu over Google and Yandex, please see How wage inflation in China supports Baidu over Google and Yandex.

Asian equity outlook

The weakening yen and relatively flat wage growth in Japan have supported Japanese markets, as reflected in the Wisdom Tree Japan Hedged (DXJ) and the iShares MSCI Japan (EWJ) ETFs. Aggressive monetary policy in the USA has supported the S&P 500, as reflected in the State Street Global Advisors S&P 500 SDPR (SPY), the State Street Global Advisors Dow Jones SPDR (DIA), and the Blackrock iShares S&P 500 Index (IVV), which have been up nearly 18% over the past year. However, tapering is now in play, and higher rates in the five-year Treasury could cool U.S. valuations going forward. Given China’s current financial challenges in the banking system, both the U.S. equity markets and the Abenomics-driven Japanese equity markets may continue to outpace China’s iShares FTSE China 25 Index Fund (FXI) and Korea’s iShares MSCI South Korea Capped Index Fund (EWY). However, if U.S. valuations continue to increase over the year, China’s valuations should become increasingly compelling. With FXI’s key holding, the banking flagship Bank of China, trading at a 0.84 price-to-book ratio and a 4.95 price-to-earnings ratio, you have to wonder how much lower Chinese banks and financials could go.


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