Shanghai Housing Bubble Pops

The LA Times is reporting A Home Boom Busts in Shanghai.

Shanghai's hot housing market has fizzled after a run-up fed by speculators, threatening a significant part of China's economy.

American homeowners wondering what follows a housing bubble can look to China's largest city.

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 — when the value of a home falls below the amount of debt on the property. 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 doubling of prices in the previous three years, a run-up fueled by massive speculation. With China's economy booming and Shanghai at the center of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up. At least 30% to 40% of homes sold were bought by speculators, says Zhang Zhijie, a real estate analyst at Soufun.com Academy, a research group in Shanghai.

"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."

The Shanghai government only pushed the market higher, he added. "Many of the officials said Shanghai's property market was healthy and wouldn't drop before the World Expo" in 2010.

Internet chat rooms recently were abuzz with a story that a Taiwanese man had jumped from the 33rd floor of an apartment tower about 15 miles northeast of downtown. Many people suspect that he killed himself because he was drowning in debt after his home investments went sour.

Managers at the complex refused to comment, but brokers indicated that the price of some units there have plummeted by more than 50% since March, when a home fetched as much as $250 a square foot, similar to housing prices in some Southern California communities.

Zhang Wei, an editor at Imagine China, a photography agency in Shanghai, was close to buying an apartment in the new Pudong development area last year.

The 25-year-old planned to use his $1,250 in savings, and his parents — a policeman and a doctor — agreed to contribute about $30,000. The family of three currently lives in a 550-square-foot apartment in an industrial district that was provided by his father's employer, the Police Bureau.

Zhang walked away from the deal after the central government stepped up its campaign to cool Shanghai's market. He noticed prices beginning to drop. "When two of the four real estate agencies near our home finally closed, I decided not to buy for at least two years," he said. "Even a 1% drop in prices is a lot of money for us."

For Shanghai, prolonged weakness in the housing market could be very painful. Like Los Angeles, Shanghai relies heavily on real estate to drive its economy. Morgan Stanley's Xie calculates that property sales directly accounted for about half of $31 billion of the growth in Shanghai's annual economic output from 2001 to 2004.

"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.

Those that thought the Boom in China would last forever, or even to the next Chinese Olympics lost that bet. Those that think housing prices in the US are a one way ticket up are also in for a rude awakening. Let's see what a housing collapse in Shanghai does to the price of copper and other basic materials. In the meantime look for enormous bubble popping events to happen in the US as well. For a preview of what is to come, simply substitute your favorite US bubble city for Shanghai, and "Chinese economy" with "US economy" in the sentences in italics above.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/