Stephen Roach says China's Housing Boom is Not a Bubble; I say "Nonsense"

Stephen Roach does not seem to understand what a bubble is. He makes the same arguments in dismissing China's property bubble that we heard in the US, regarding "solid demand".

Please consider China’s Housing Market Isn’t Overheating, Roach Says

The property boom in China isn’t a bubble because it’s supported by “solid” demand for residential housing, according to Stephen Roach, chairman of Morgan Stanley Asia Ltd.

While portions of the real-estate market such as high-end apartments are overheating, demand for residential homes will remain robust as rural Chinese migrate to bigger cities, Roach said in a radio interview from Hong Kong with Tom Keene on Bloomberg Surveillance.

“This is just a sliver of the property boom,” Roach said, citing that each year since 2000, between 15 and 20 million people migrate to Beijing, Shanghai, and second- and third-tier cities in mainland China. That’s two and a half New York Cities created annually, he said. “This underpins a huge demand for residential property. This property has not overheated and the demand for this property is very, very solid.”

The nation’s property prices rose 12.4 percent in May from a year earlier, the second-fastest pace on record. China’s banking regulator said today it sees growing credit risks in the nation’s real-estate industry and warned of increasing pressure from non-performing loans.

China’s lawmakers have raised down payment requirements and mortgage rates and restricted loans for multiple-home buyers as they seek to dampen record property price gains. The government’s “decisive” actions in April are working to cool the sections of the housing market that were overheating, according to Roach.

“By all accounts, it looks like the measures are working for now,” he said.

Demand Irrelevant

Flashback 2000: There was enormous demand for internet stocks, pushing up the price and creating a bubble.

Flashback 2005: There was enormous demand for Florida condos. People were camping out overnight and entering lotteries for the right to buy condos.

2010: There is massive demand in Australia and Canada for housing. However that demand is finally showing signs of weakening.

Certainly there is a larger population in China and somehow Roach thinks that proves there is no bubble. It doesn't.

What Constitutes a Bubble?

In the case of internet stocks, it's when speculative demand exceeds the fundamentals. The same applies to housing.

The fundamentals for stocks are earnings growth, sustainability of dividends, and the price to earnings ratio (PE). In regards to housing, a bubble occurs when demand pushes up home prices far beyond buyer's ability to afford the units they are buying.

That is exactly what happened in the US bubble that popped. It has also happened in property bubbles in Australia, Canada, and China, bubbles that have not yet popped.

In China, there are malls, even entire cities that are vacant. A huge percentage of units in China are held for appreciation, never lived in. Yet because there is "demand" for property, Roach claims there is no bubble.

Nonsense.

Ridiculously strong demand is a necessary requirement to produce a bubble. The second requirement is a price increase that exceed the ability of buyers to repay the loans or sell to the next "Greater Fool".

In the US, home prices rose several standard deviations above rental prices and above wages. The same has happened in China. Thus, China's property boom is in a bubble state.

Please consider 10 Signs of Speculative Mania in China and a followup article, Email from a Chinese on China's Real Estate Bubble.

No one knows when willingness of buyers to pay absurd prices will change, but sentiment will change. Perhaps China's property bubble will expand further, but bubble sentiment always pops by definition, and China is in an enormous bubble.

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