China Business

China’s Real Estate Bubble Has Burst: The View from Qingdao

China real estate bubble

I have been engaged in a friendly debate with a number of economists about when China’s real estate “bubble” will finally burst. The opinions of the economists vary. Some believe the bubble will never burst. Some project the bubble will burst “sometime” in the future. The future date is usually something vague like 2013. The argument being that the Chinese government will not allow the bubble to burst until after its 2012 power transition.

For the last year, I have been arguing that all these projections are too optimistic and since June I have been contending that the bubble has already burst.

Recent events here in Qingdao (where I live) illustrate my point. Since June of this year, officially advertised prices for new residential real estate projects in Qingdao have fallen an average of 30%. In a market that has seen nothing but price increases for many years, this has been a shock to local real estate purchasers. As is typical in China, most new real estate projects have not been completed. In a typical project, buyers purchased in June for a project that will not be completed until sometime at the end of next year. Now they are seeing units in that same complex being sold at 30% or more less than what they paid in June. Since prices are still in free-fall, they have no idea how bad it will be.

Owners in these projects have formed groups on QQ and Weibo to discuss their fate and to share rumors. On many projects, these unfortunate buyers have demanded the developer reduced their prices to match the recent discounts. In the alternative, they have demanded their purchase contracts be cancelled. Most of these buyers have paid substantial down payments, so the reduction in price or the cancellation would require the developer to pay refunds to the buyers. Of course, none of these remedies were contemplated in the real estate purchase agreements and for this reason, most Chinese real estate developers have refused to cancel purchase contracts. As a result, many buyer groups have organized formal protests, picketing at the sales offices of distressed projects. These protests have had some impact and there are reports some of the larger real estate developers are starting to offer at least partial price discounts. No developers have offered refunds.

The impact of the price decline has been considerable. Since the prices are widely advertised in the local newspapers and other media, the decline and the amount of the decline is well known in the local community. Most local residents have real estate fever, and they will freely tell you that prices have declined a minimum of 30%. This has had an immediate impact in three important ways. First, the sale of existing units has fallen dramatically. The only sales occurring are for drastically discounted units, with 30% to 50% discounts becoming normal.

Second, work on uncompleted projects has slowed or stopped. Thus, all those buyers who paid deposits risk being trapped in permanently uncompleted projects. Third, the purchasing of undeveloped land has virtually stopped. Even though the local government has offered substantial discounts on land, with so many dead or dying projects littering the local landscape, developers are in no mood to take on new land at any price. This is particularly true in since Chinese law prohibits requires land be developed within two years after its purchase. The lack of land sales then means the primary source of income for the local government has dried up.

In response to this, the Qingdao government has announced a number of new measures intended to loosen many of the restrictions on purchasing residential real estate that have been imposed over the past several years. This includes a reduction in interest rates, a reduction in the amount of down payment required, and a relaxation on restrictions on purchases of residential real estate for purely investment purchases. The government is confident these changes will bring the real estate market back to a “normal” level, with normal being defined as approximately the price level of June of this year with no major increase or decrease. The local newspapers carry articles virtually every day explaining how 2012 will mark a return to the formerly strong real estate market of the recent past.

However, these policies appear to conflict with the most recent decision of the central government to leave the recent restrictions in place. Beijing apparently believes that the bubble has not burst but rather that the real estate market is returning to a normal, healthy condition. Whether any of the locals believe the above is “healthy” and “normal” is not known to me because I do not care. To put it bluntly, I am certain the Chinese real estate market cannot be guided be back to a healthy, vibrant state in 2012.

Once a real estate bubble bursts there is no government powerful enough to stop the resulting collapse in prices and subsequent effects. The real estate bubble has burst in China and the government must now work to contain its impact. Though governments cannot stop a real estate bubble from bursting, they can play a role in dealing with the impact. Some governments push the economy to recover quickly. Others take counteractive measures that make matters worse. We will have to wait and see which approach China takes. So far, the signs are not encouraging.

What are you seeing out there?

Update: A number of readers have written to point out a very good article by Patrick Chovanec in Foreign Policy Magazine, entitled China’s Real Estate Bubble May Have Just Popped. To put it mildly, Chovanec too seems very worried by what he is seeing with China’s real estate market.

12 responses to “China’s Real Estate Bubble Has Burst: The View from Qingdao”

  1. Steve,
    I am a senior agent/consultant at and have also come to similar conclusions. The second hand property market has also seen a decline since March 2011. The real estate bubble has definitely burst in Qingdao, however, we have not yet seen a dramatic decline in rental prices as of yet.

  2. Steve,
    Thanks for the report. I wonder how the drop in home prices in China will affect the money flow from mainland China to Vancouver’s real estate. The real estate market in Vancouver is taking a pause now. It will be interesting to see what will happen next year, 2012.

  3. Things are going to get very tough in the tier 2, 3 cities as the economy slows down. I see 2011 as being a lot like Japan in 1989, when Japanese real estate reached its apogee, ushering in the lost decade, which started in 1990 and has continued to the present.
    Beijing will protect Beijing and Shanghai because this is where many western companies have their headquarters, and the large number of western expatriates there. In essence, these two cities are big Potemkin villages; westerners tend to think that they are representative of China, even though they are just pretty window dressing. Got to keep those gullible westerners happy even though the rest of the Chinese have to suffer. Otherwise, how will China get those stories about the rise of China out to the rest of the world?
    For most Chinese, there is going to be a glass ceiling. Those who made it by now are safe, but those who haven’t yet made it, will find it very hard to make the incomes they have heard stories about. The rich/poor wealth gap will widen, and many of the wealthy will choose to emigrate out of China to Australia, New Zealand, the US, Canada and the UK because they will feel safer there. The huge capital flows out of China are already telling that story.
    This is the price the Chinese Communist Party has paid for front-loading China’s growth. The fast growth is over now, and the bill has now arrived. The fat days are over.

  4. I think the bubble “bursting” is healthy although it’s going to be painful for some. There is no doubt there is quite strong underlying demand for housing in China’s cities. The issue has been affordability. If prices drop 50% or more a significant number of people can enter the market and get the housing they need. At present, so many young people in China’s cities are locked into renting substandard housing. There was no reason based on incomes why outer urban housing of the type that Steve describes was so expensive other than speculative activity.
    The building of 30 million new controlled rental housing units by 2015 will put a floor under demand for construction materials, even if the commercial sector takes some pain.
    I strongly disagree with @ Paul Denliger’s comment on Beijing / Shanghai being “Potemkin villages”. The rest of China has been developing well and many Tier 2,3 & 4 city environments, infrastructure and livability are far better than Beijing. China is largely unconcerned by the opinions of expatriates and is not putting on any form of show for their benefit.
    Overall a strong drop in real estate prices and a realignment of the market towards catering to the demand that exists and the prices that can be paid is a positive outcome. While the speculators will take a hit, housing markets and policy should always be focused on the needs of the real economy – ie. owner occupiers and renters – and not on parasitic financiers.

  5. I can’t state how strongly I disagree with @ Paul Delinger’s comments.
    The slowdown in the speculative part of the real estate sector does not represent an implosion of the real economy. I think it is healthy and sane to bring prices back in line with people’s real capacity to pay. The bubble that emerged over the past 5-6 years was one of several since housing was largely privatized in the early 90s. The vast flood of cash released into the economy since the GFC in 2008, while funding many useful long term infrastructure projects, also had a very negative outcome in terms of incredible asset price inflation, particularly for housing. Given the continued real need for housing by an increasingly urbanized population and their lack of capacity to pay the absurd prices demanded, a readjustment and drop in prices will enable housing markets to recover on a more sustainable basis. There is real demand out there and a lot of it, but it lacks the income and savings to purchase at current speculative prices.
    I live in a million dollar apartment in Beijing from which the owner owner derives just over a thousand dollars a month income post tax. That’s insane.
    The development of 30 million low income rental units over the next 4 years will meet around 8% of total national housing demand. It will also drive some GDP growth, though it won’t create vast profits for speculators. The realignment of demand and supply does not represent collapse.
    On the “Potemkin Village” claim for Beijing and Shanghai, I can only presume that Paul has not traveled extensively in China. Tier 2, 3 & 4 cities are becoming quite livable and compare very favorably to Beijing which is moving backwards as population growth has exceeded its capacity. Kunming, Chengdu, Chongqing, Xi’an, Fuzhou, Nanning, Guiyang, Harbin, Dalian, Qingdao all have impressive infrastructure, education, transport etc. Even the dreaded coal cities such as Taiyuan and Baotou have improved dramatically. Smaller cities in the west, as far from the “Potemkins” as you can get, have been rebuilt from the ground up and have become decent places to live with quite sophisticated infrastructure and facilities. All this was developed without regard for expats. Frankly I don’t think local government took much consideration of what passing foreigners might think of all this and had much greater regards for the demands of local populations and their own CCP KPIs.
    The real economy will take some hits from dropping demand in Europe and the US. Reasonable commentators expect a drop in GDP growth. Markets are tough. That’s life. However, total global exports continue to rise as industries adjust and adapt, find new sectors to enter in current markets (both domestic and international) and develop new markets for new products.
    However, an end to a real estate bubble is not the end of the world. In terms of restoring a focus on success in the real economy it is also healthy.

  6. For me, as a Real Estate Broker in New York, the debate about the bubble bursting in China is over. Personally, I have taken two clients from Hong Kong out to view apartments in Manhattan. Both of these potential investors had the same reason for wanting to buy in New York; because they want to get their money invested in a more stable Real Estate climate. Both of them are very lucky, as they were able to sell their property in China, before the market takes a turn for the worse.

  7. I forgot to mention that China’s rapidly aging workforce will mean that its productivity is peaked, which in a way is good thing because the demand for its products has largely dried up. Beginning in 2015, this aging of the workforce is going to make Japan’s aging and shrinking workforce look like nothing. Add on this another effect of the one-child policy in that each child will have to support two parents and four grandparents and you have an inverted triangle, which is a nightmare for planners.
    Yes, the tier 2 and tier 3 cities LOOK very nice, but they won’t last. As always in China, the hardware is very impressive until it careens off the tracks like the HST in Wenzhou in July. Then everybody asks each other why they couldn’t have seen this coming sooner. As someone who lives in CBD in Beijing, I am constantly surprised at how lousy the construction on a “million dollar home” is. Give me a break!
    If the tightening of China’s economy is sustained (and I expect it to be), then the tier 2 and 3 cities will rapidly decay, just like everything else in China. China is built for fast sustained development and a 10-year depression will make everything look a lot less pleasing than it does now.
    The whole argument that Chinese want to own homes if only they were 50% cheaper very amusing. That certainly hasn’t happened in the US. Even though prices have come down 30-40% most people have converted to renters, and will stay renters. No one wants to buy out of fear that prices will fall further after they have bought their home. To say that Chinese will come into the market if prices fall is quite simply, a laughable argument.
    If anything, the bubble in China is worse than in the US. The party will go bankrupt covering the losses of many state-owned enterprises, and this will lead to increased party infighting. This is why so many Chinese are spending their money overseas.
    It is truly a case of spend it or lose it, and they know it.

  8. Maybe build some common sense housing and retail mixed use center areas that are all within biking and walking distance from one another. Forgt this high rise condo dream model fueled by road building, cars and parking garages.

  9. Does anyone know how I can sell a property in Dangyang Jiangsu China? Our father passed away and has a property aboard. We have an open probate case in Fl and need assistance. If you know an Attorney in China that deals with this, please let me know.
    Thank you

  10. I am glad that the housing “bubble” n China has finally “busted,” an the housing prices can drop to the level that the middle class ordinary folks could eventually afford, as opposed to simply an investment vehicle to get rich for speculators. In the past few years so many of Chinese relatives wanted to buy homes for speculation and urged me to do so. Having seen the US housing bubble,
    I told them that the Chinese housing market couldn’t sustained itself, as the way it was going. Now they would learn that, just like the stock market, the housing prices can go up and down. It would make the Chinese housing market develop in a more normal way. More importantly, now or maybe a couple of years later, I may finally be able to buy a decent house in my home town for my parents using my US engineer’s salary so that they could retire comfortably. They have worked so hard and suffered so much throughout their lives.
    Paul Denlinger sounds like a sage. He is so certain that China is now going to bust, with his statements ‘The party will go bankrupt covering the losses of many state-owned enterprises, and this will lead to increased party infighting. This is why so many Chinese are spending their money overseas.” This really makes me laugh. Haven’t we heard this before? Gordon Chang, anyone?
    Has US collapsed after its housing bubble busted in 2007? Or even after the Great Depression? What is the average household debt in China? How many people in China own a house, even in tier-1 cities in Shanghai and Beijing (compared to in US or Japan during its house bubble peak)? Will the housing bubble in China led to a credit crunch?
    Yes, the population growth in China may have peaked; but still how many young people enter the job market each year? Wasn’t it just a year or two ago we read all these articles in the West about the Chinese “ants” (young colleague graduates) who couldn’t find jobs? And many more articles about the CCP has kept the economy going so as to employ all the young people? So with the population aging, wouldn’t it make the job of CCP easier as they don’t have to keep the economy growing at unsustainable rate of 9% or more?
    I have always known Chinese who invested in the overseas; and many will do so more now that there are fewer opportunities in China to make quick bucks. Now that the US and especially Europe look so cheap, no wonder many savvy Chinese who have means to invest in the West. It is not different from the rich Westerners invest in China in the past decade.
    In any case, the bust of the Chinese bubble will certainly make many Chinese — most of who are corrupt Chinese officials anyway — and overseas investors suffer; and slow down the Chinese economy considerably. But I think that this is in fact a good thing in disguise. It will make the housing more affordable for ordinary Chinese, and reduce the inflation which affects far more ordinary Chinese like my retired parents. If it reduces the growth rate of the Chinese economy to 8%, 7% or even 5%, so be it. In the long run, it will make the Chinese economy far healthier.

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