China's Real-Estate Frenzy

Here is a good op-ed in today's Wall Street Journal ("China's Real-Estate Frenzy") that highlights the growing real estate bubble forming in China. After experiencing a modest correction during the summer, pricing and activity appear to be back in an upswing. However, as yesterday's 25bps interest rate hike demonstrated (building on the first 25bps hike in October), Chinese government officials are slowly waking up to the realization that they need to do something before things get really out of control. One interesting point highlighted in the article is that there are no property taxes in China. As such, the carrying costs for holding an empty apartment are negligible. In order to curb speculative activity, I think Chinese officials should implement some sort of property tax, even if modest.

Here are some other good highlights from the article:

Last week I sold an apartment in Beijing for more than 2.5 times what I paid for it five years and three months ago [more than a 20% IRR!]. When I asked the buyer why he was optimistic about real estate, he explained that land was limited in Chinese cities and government policies would keep the market going up.

Housing prices in the U.S. peaked at 6.4 times average annual earnings this decade. In Beijing, the figure is 22 times.

In the past, when China could depend on growing export markets, technocrats in Beijing were able to keep speculative frenzies in check with periodic crackdowns...But this time nobody is listening. Local governments and banks have set up off-balance sheet vehicles to conceal loans and keep the spending boom going. Fitch Ratings estimates that not only did banks exceed the central bank's 7.5 trillion yuan ($1.1 trillion) cap on lending for this year, they made an additional three trillion yuan of these shadow loans.

When a government loses control of monetary policy, inflation follows. A few months ago, only the scariest "China bears" predicted 6% inflation for next year; now the People's Daily is admitting it may reach those levels "in some months."