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Sunday, January 08, 2006

Shanghai's Bubble Pops

This is what we are hoping to avoid:

A Home Boom Busts, by Don Lee, LA Times: ...Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices. For the first time, homeowners here are learning what it means to have an upside-down mortgage ... Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.

"The entire industry is scaling back," said Mu Wijie, a regional manager at Century 21 China, who estimated that 3,000 brokerage offices had closed since spring. Real estate agents, whose phones wouldn't stop ringing a year ago, say their incomes have plunged by two-thirds. Shanghai's housing slump is only going to worsen and imperil a significant part of the Chinese economy, says Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong.

Although the city's 20 million residents represent less than 2% of China's population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20% of the country's property value. About 1 million homes in Shanghai alone — about half the number of housing starts for the entire United States in 2004 — are under construction. "They'll remain empty for years," Xie said, adding that a jolting comedown also was in store for other Chinese cities with building booms — including Beijing, Chongqing and Chengdu — though other analysts say the problem is largely confined to Shanghai.

Shanghai's housing bust comes after ... a run-up fueled by massive speculation. .... At least 30% to 40% of homes sold were bought by speculators...  "Ordinary people had no option but to follow the trend," Zhang said. "Worrying that prices would be even more unaffordable tomorrow, many of them borrowed from relatives and banks to buy as soon as possible." ...

Some still see promise in the Shanghai market. Incomes are rising and droves of people are relocating from the inner city to outlying areas... What's more... the Shanghai government — which owns all the land — has auctioned off few lots in the last two years, which will limit the number of housing units in the future. But that's little solace for homeowners who have seen inventories rise even as buyers show no hurry to come back into the market.

In Shanghai, people blame the popping of the housing bubble on the central government, which has applied one measure after another in the last year to quash excessive speculation and price increases. Banks were ordered to raise their best rate on home loans to 5.5% from 5%. Home buyers were required to make down payments of at least 30%, up from 20%. A 5.5% capital gains tax on home sellers' profits was imposed. Beijing also levied a 5% tax on the sale price of homes sold before two years of ownership. "It's killed the speculators," said David Pitcher, a Shanghai developer and former head of CB Richard Ellis' office here. ...

But it's not just speculators who have bailed out of the market. A lot of potential Shanghai buyers have been scared off by numerous reports of sinking home prices and desperate action by some owners. ... Few analysts are betting on a quick turnaround. Yin Zhongli, an economist at the Chinese Academy of Social Sciences in Beijing, says a housing crash takes time to clean up. He worries that the financial sector will be crippled by the real estate fallout. Last year, he said, 76% of all bank loans in Shanghai were in real estate. ...

    Posted by on Sunday, January 8, 2006 at 12:33 AM in China, Economics, Housing | Permalink  TrackBack (0)  Comments (13)

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