Glance across the Shanghai skyline and you’ll get a glimpse of what has become a symbol of Chinese prosperity over the last two decades. The high rising skyscrapers and glitzy multistory office buildings have not only come to symbolize China’s economic prosperity, but its modernization as well. The city has come a long way in recent years as this Chinese skyline was nothing more than farmland twenty years ago. But as visitors look over the booming horizon of Shanghai they may not realize that under the surface lays signs of a weakening markets as a potential property bubble looms over China’s largest city.
There’s no question that China has been in the midst of a major property boom in recent years, and investors have been pouring into Shanghai to get involved in the “gold rush.” But before purchasing your health insurance and following suit, you should be aware of the potential signs of a housing bubble which many fear will lead to a collapse with global repercussions.
Those who fear a bubble point to two key factors: drastically rising property values and the fact that lending has been growing exponentially. The situation became even more grim when Moody’s Investors Service downgraded China’s property sector from “stable” to “negative” recently on concerns that rising interest rates and reduced bank lending would weaken credit conditions and diminish demand.
The Chinese government is well aware of the issue at hand as they are trying to prevent a potential bubble by warning banks to increase their deposits and capital on hand as a way to control lending. They’re also putting restrictions on property purchases as any resident in China trying to purchase a second home will require a minimum of 40% down payment.
However, there are those that are remaining optimistic. A recent report by the Economic Intelligence Unit (EIU) indicates that the country is not facing a housing bubble, although there could be a short-term mild correction. “The Economist Intelligence Unit’s new models of population and incomes in China’s cities point to strong underlying demand for housing throughout the next decade. They indicate that housing demand in China is growing so quickly that a correction in the next couple of years will be short-lived.”
Also, judging from a number of deals done by some of the world’s most sophisticated investors, it’s clear that not everyone believes that Shanghai is in a bubble. One particular investor recently bought 54 apartments in a single day and others are spending millions for high-end property in the heart of Shanghai.
Clearly, not everyone can agree upon Shanghai’s property future. Whether we will see a continued boom or the beginning of a bubble in Shanghai is unclear, but the one thing that is clear is that almost anything can happen in China’s volatile market.