Shanghai housing bubble pops

globaleconomicanalysis.blogspot.com -> latimes.com :

American homeowners wondering what follows a housing bubble can look to China's largest city. Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices. For the first time, homeowners here are learning what it means to have an upside-down mortgage - when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.

Shanghai's housing slump is only going to worsen and imperil a significant part of the Chinese economy, says Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong. Although the city's 20 million residents represent less than 2% of China's population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20% of the country's property value. About 1 million homes in Shanghai alone are under construction. "They'll remain empty for years," Xie said.

Shanghai's housing bust comes after a doubling of prices in the previous three years, a run-up fueled by massive speculation. People blame the popping of the housing bubble on the central government, which has applied one measure after another in the last year to quash excessive speculation and price increases. Banks were ordered to raise their best rate on home loans to 5.5% from 5%. Home buyers were required to make down payments of at least 30%, up from 20%. A 5.5% capital gains tax on home sellers' profits was imposed. Beijing also levied a 5% tax on the sale price of homes sold before two years of ownership. "It's killed the speculators," said David Pitcher, a Shanghai developer and former head of CB Richard Ellis' office here.

Internet chat rooms recently were abuzz with a story that a Taiwanese man had jumped from the 33rd floor of an apartment tower about 15 miles northeast of downtown. Many people suspect that he killed himself because he was drowning in debt after his home investments went sour. Brokers indicated that the price of some units there have plummeted by more than 50% since March, when a home fetched as much as $250 a square foot, similar to Southern California communities.

For Shanghai, prolonged weakness in the housing market could be very painful. Like Los Angeles, Shanghai relies heavily on real estate to drive its economy. Morgan Stanley's Xie calculates that property sales directly accounted for about half of $31 billion of the growth in Shanghai's annual economic output from 2001 to 2004.

Few analysts are betting on a quick turnaround. Yin Zhongli, an economist at the Chinese Academy of Social Sciences in Beijing, worries that the financial sector will be crippled by the real estate fallout. Last year, 76% of all bank loans in Shanghai were in real estate. "Now is the time to swallow a bitter pill," Yin said.

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