While our local media are full of frothy fear stories of housing bubbles and China’s impending global dominance, there’s many a dip twixt the boom and the bust, as illustrated by this New York Times snapshot of the building craze now gripping China:
SHANGHAI, Oct. 16 - Move over, New York. This year alone, Shanghai will complete towers with more space for living and working than there is in all the office buildings in New York City.
That is in a city that already has 4,000 skyscrapers, almost double the number in New York. And there are designs to build 1,000 more by the end of this decade.
The changing Shanghai skyline includes Skyline Mansion, the white building at center, which will be one of the most expensive apartment buildings in the city.
The numbers are themselves staggering:
And this year the building boom is at a frenzy, with the nation expected to lay down the finishing blocks on 4.7 billion square feet or more of construction, a record, up from 2 billion in 1998.
Just to put that in context, 4,700,000,000 square feet is 168 square miles, more than two and a half times the size of Washington DC. In one year.
The first one worked so well, why not build 2½ a year?
“There’s no doubt what is happening in parts of China is on a scale we’ve never seen before,” said Richard Burdett, professor of architecture and urbanism at the London School of Economics. “But more importantly, it’s the fastest pace of development in the past 50 or 100 years.”
Why is China booming? Great balance of trade, and also something to do with property rights and homeownership behavior:
For decades after the Communists took over in 1949, there was relatively little housing construction or office building under central planning.
But since the early 1990’s, Shanghai and other cities have been making up for lost time.
They certainly have!
What happened then?
China’s housing rush is being fueled by mortgage rates around 5 percent and huge inflows of foreign capital. But the boom is also driven by landmark government housing reforms from the 1990’s that for the first time since the Communist revolution of the late 1940’s allowed Chinese to acquire their own homes rather than live in government housing.
Sorry, Chairman Mao, the fastest way to undermine communism is to let people make themselves rich.
“You know for a half-century, nothing was built in China,” said Mr. Jun Xia, a principal in the Shanghai office of Gensler, a global architecture and design firm. “Now there’s a lot of excitement and demand for new houses, and excitement about a new way to live.”
Development booms periodically recur, the more so when a country emerges from a massively dysfunctional economic system and provides fair rules and positive incentives. When that happens, people do rush to invest in property, because it is both security of tenure and tangible durable wealth. Still, because land value is a residual, so is the value of existing property, and the prices will stay high only so long as the economy thrives — which it is:
Many Chinese are acting as if the housing boom will not fizzle any time soon. The economy is soaring, income is rising, Ikeas and Wal-Marts are popping up in second-tier cities and tens of millions of people are giddy about the prospects of owning their own homes, driving their own cars and adopting a more modern lifestyle.
It will take a lot of building to satisfy a half-century’s pent-up hunger for property ownership.
An apartment complex going up in Shanghai. With mortgage rates around 5%, energetic foreign investment, rising income and official approval, the nation is making up for years of inattention to construction.
Even allowing that the Chinese property market may be in for a decade-long boom, any market can be overbuilt
Markets move in phase delay. Changes occur in sequence in demand, completion, construction, and financing, each typically with both shorter frequency and greater amplitude. Add to that leverage — whether of debt or household income — and optimism, and the faster the buildings physically go up, the greater the chance that once up, they will economically drop down.
I have seen Shanghai’s housing future, and it looks a lot like Honolulu, circa 1990.
During the 1980s, property values on Oahu and parts of the neighbor islands shot sky-high as wealthy speculators from Japan bought real estate as fast as it became available.
As the squeeze continued, locals who ventured into the home market paid record amounts, particularly those who wanted to live in urban Honolulu.
Others moved to newly constructed bedroom communities in Central and West Oahu. The cost of Oahu housing became so high during this period that even the city and the state got into the act, creating sales lotteries for affordable housing at Ewa’s West Loch and Kapolei.
As the decade came to an end, the Japanese bubble burst, Hawaii’s economy faced recession and property prices all over the island started to slide.
The hangover lasted more than a decade:
[I]n the late ‘Eighties and early ‘Nineties, Japanese buyers, flush with cash from their nation’s stock-market boom and aided by the yen’s strength against the dollar, bid prices into the stratosphere.
In 1989 and 1990, waterfront homes in Hawaii sold for an average of $15.6 million, having more than tripled from the level two years earlier. (They now go for $7.3 million.) One Japanese tycoon famously toured Oahu, choosing houses to buy from the comfort of his limo. He’d have an assistant, armed with a briefcase stuffed with cash, knock on doors, to see if the owner was willing to sell. Some owners became so annoyed by repeated inquiries about their properties’ availability that they posted “Not For Sale” signs to keep bidders away.
After Japan’s bubble economy popped, prices of many high-end Hawaiian properties plunged by 50% to 75%, in some cases more than wiping out all the gains of the previous few years. The debacle came as the U.S. was sliding toward recession and was a harbinger of weakness in the entire American housing market.
While history never repeats itself exactly, it often resonates with echoes from distant harmonies. China is now gripped by a combination of high liquidity, burgeoning domestic demand, favorable currency conversion rates, and an overall market mania that says the sky’s the limit. All this speculation is surfing on a tide of investor confidence.
How long a ride?
China, aloha.
