This bubble is unmatched in history

Bad news for Chinese real estate market is constantly coming out these days. Western economists and analysts mostly think about the issue in the normal context of a free market economy. But the Chinese economy is not a free market economy, especially in the property market.

There is no doubt that the early development of the property market in the 90s and the first decade of 21st century long with the whole development of the economy brought millions of Chinese people out of poverty. However, because the Chinese government is the sole owner of all land in mainland China and has complete control of banks, law and media, to say that the Chinese government has the monopoly power over the property market is an understatement.

Based on analysis of the financial reports of developers in China, the government takes away 40%-45% of the revenue of a project. The government is the biggest winner for sure. Land has been the magic treasury box with endless cash flow for the governments since the beginning of commercial property development.

However, at the beginning of 2010’s, the return on investment of residential property at good location with reputable school was at 2% in 1st tier city, such as Shanghai, while the interest rate for one-year fixed deposit was at 3%.  The residential property price was already out of reach of ordinary people in China. But Chinese people was still pouring money into the property market in strong believing that the government wouldn’t allow the property price to drop and the price of property would keep going up.  With a stock market of disappointing performance and bad reputation, they believe that buying property was the only way for investment. To be sure, with capital control for overseas transaction and a casino like stock market, the only valid way for Chinese people to invest was buying property.

Moreover, home ownership is not a dream, but a necessity in Chinese culture. It was not uncommon for a marrying couple to buy an apartment for the new family with the help from their parents from both sides. This further made an impact the consumption of other items from these 3 families.

Meanwhile, although the government already realized that the property market at such price level was not sustainable, they cannot afford to lose the magic treasure box. They tried their best to stop people from speculating the market using policy tools and propaganda machine on one hand, while made all the efforts to block any reports or comments pointing out potential property market crisis using censorship tools, and even to order the property developers not to drop the selling prices on the other hand.

Chinese property prices kept going up for almost another decade. The most recent available statistics showed that it took 20 to 43.5 years of median income to buy an apartment unit in 1st and 2nd tier cities in China. Meanwhile, Banks did not stop lending even they sense the risk, because the government owns banks. In addition, based on the relevant Chinese law, the banks are actually not bearing any direct risk for the mortgage, because in the great People’s Republic of China, once the buyer stop paying the mortgage, the bank will get the property, but it’s not the end of the contract, unlike in any other country. In the case of the selling price of the property cannot cover the rest of the mortgage owed by the buyer, the unfortunate buyer still has to pay the difference! These people not only lost their home, but most likely would carry the debt in the rest of their life. It’s happening now and more will come.

When I travelled and saw concrete jungles of high-rise buildings in China in recent years, I saw craziness of people from buyers, developers, bankers and government officials and wondered how ugly this would end up.

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