China’s Real Estate Bubble Warning Signs Are Flashing

To say China has the next great real estate bubble waiting to be popped, it’s an understatement. For investors, many of the usual bubble warning signs are flashing.

According to The NYT, last year a record $560 billion of residential property was sold in China, an increase of 80% from the year before. A tremendous rise in construction, lending and speculative buying — housing starts nationwide rose nearly 200% in 2009 — are clear signs of  a rapidly growing real estate bubble.

The developer of a luxury riverfront complex in the heart of the financial district in Shanghai, says he is having no trouble finding takers for units that come with a $45 million price tag.

“We’re selling three to four apartments every month,” the developer, seated in a white Versace easy chair, told the Times. “Now, people here want something more luxurious; they’d like a new lifestyle.”

With prices skyrocketing, and with clear signs of exuberance everywhere developers are scrambling to build more mansions, villas and high-rise apartments. An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou –an important trading center as well as a busy port and the capital city of the province of Guandong — one of the highest prices paid for any property, anywhere.

Fueled by low interest rates, property values in China’s urban centers exploded in 2009 after prices had already doubled over the three previous years. Shanghai’s Pudong district, for example, experienced close to a 60% rise in a matter of months. A typical 1,100 sq/foot apartment in Beijing now costs up to $200,000, that’s about 80+ times the average annual income of the city’s residents. Most Chinese home buyers expect that today’s high prices will keep climbing, so they are stretching to pay prices at the edge of their means or beyond. Statistics from Goldman Sachs (GS) showed that over the past six years, housing price hikes had outpaced wage hikes by 30% in Shanghai and 80% in Beijing.

There is no question China is in the middle of a spectacular real estate boom. The question is whether it is in the middle of a rapidly growing real estate bubble.

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