Bloomberg Writes: Chinese Still Prefer Property Over Stocks

Matthew Zhou and his wife spent 1.6 million yuan ($261,000) to buy a two-bedroom apartment in eastern Shanghai in August because they saw no potential to make money in China’s financial markets. “Home prices keep rising, so I’d rather buy a place now than put the money in the stock market,” says Zhou, 30, an information technology engineer at a state-controlled bank in Shanghai. Gains in equities “could never outpace the growth of home prices,” he says.

Okay Mr. Zhou, that’s quite a believe. Perhaps you should study history in order to see that over the long run capital markets appreciate much faster than real estate. In fact, real estate shouldn’t (outside of artificial stimulus) appreciate faster than the rate of inflation.

Real estate has attracted “the lion’s share” of household investment in China, according to a July report by Standard Chartered (STAN:LN). It has made up more than 60 percent of household assets since 2008, compared with 48 percent in the U.K., 32 percent in Japan, and 26 percent in the U.S., the report says.

That is massive. Another indication of a bubble.

Wang Jianlin, China’s richest man and owner of Dalian Wanda Group, the country’s biggest commercial land developer, says the property market is “definitely” in a bubble, though it’s “controllable, not big.”

Ok, Mr. Wang Jianlin,  which one is it. By definition bubbles cannot be controlled.  At least in this case you can’t have your cake and eat it too. If controlled, by whom? You, Chinese government or millions of Chinese citizens speculating on real estate. Will they be rational?

Michael Chang, a 33-year-old investment manager in Shanghai, isn’t concerned about bubbles. He spent 1 million yuan on a 215-square-foot, one-bedroom apartment in Beijing in August last year and 5 million yuan on a 1,400-square-foot unit in a Tishman Speyer Properties development in Shanghai this year. “You see home prices rally even when the curbs are in place, not to say when the bans are lifted,” says Chang, who expects Shanghai prices to rise 50 percent in the next five years. Citing a recent ranking of global housing prices in which Shanghai placed sixth and Beijing did not appear, he says: “Let’s talk about bubbles when Beijing and Shanghai rank among the world’s top five most expensive cities.”

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If the statement above doesn’t scream “Bubble” nothing else will.  Mr. Chang anticipates 50% rise in 5 years in an already overpriced market while there are literally hundreds of empty cities all over China.

Perhaps Mr. Chang is right. Perhaps it will go up 100% over the next 5 years. Who knows. Perhaps you should even invest with Mr. Chang. Markets tend to be irrational at times. However, make no mistake. This market will blow up and when it does millions of Chinese families will lose everything.

How do you say Revolution in Chinese? 

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