Tuesday, November 27, 2007

Increasing Risk: Real Estate in China

There is one real estate market where a meltdown would comparatively make the situation in the U.S. appear to be minor league. Only one country has both the population and rising speculative real estate values to claim this distinction – China.

A number of economists such as Yi Xianrong are sounding the alarm. There are two primary issues, the first being the false data on many mortgage applications. This is somewhat tempered by the requirement for large down payments on many real estate loans in China.

"I estimate that the large majority of mortgage holders would not meet the standards for even subprime loans," Yi said in an interview with the state-run magazine Oriental Outlook.”

The second risk is the speculative real estate spiral. A good number of owners view real estate as a money-making scheme, similar to the “flip this house” phenomena in the U.S.

“Many Chinese families are already deep into speculating on property, a main driver of the surging prices that have Chinese authorities worried that a bubble might be forming.”

It is still an open question regarding how long the situation can continue and how badly this speculative cycle will end. There is still a huge demand for housing in China, this has to be countered with the huge price increases and questionable credit practices for personal housing loans.

Housing market, risk surge in China