Is Shanghai Property The Next Dubai ?

Stories of rapidly inflating property prices, loose credit and off-plan speculation sound only too familiar to veterans of the Dubai real estate crash, and yet this is what we hear from Shanghai these days. How long before the Chinese property bubble bursts?

Of course, it is wrong to compare a wealthy, advanced economy like Dubai with an emerging market economy like China with very low salary levels. And yet this also highlights the severity of the problem in Chinese real estate right now.

Shanghai prices.

Shanghai property is presently 50 percent more expensive than in Dubai, and yet per capita income in Dubai is up alongside American levels, and higher for most property buyers who still mainly pay in cash and not debt.

Last year real estate investment in China more than doubled to $156 billion, and residential property prices shot up 68 per cent to $450 per square foot in Shanghai. Sounds very much like Dubai in 2008, before the crash in October of that year.

The Chinese authorities have responded belatedly with restrictions on new lending to property developers and buyers. Yet the risk of withdrawing liquidity from an investment bubble is only too clear. Bubbles burst when liquidity is withdrawn.

As in Dubai, China's real estate and construction sector has become an important motor of domestic economic growth, particularly after the 16 per cent slump in exports last year which comprises around two-fifths of GDP.

It has been driving purchases of everything from cars to home furnishings and building materials. Pull out the real estate boom and Chinese economic growth is going to undergo a huge correction.

Not different this time!

They said it could not happen in Dubai but it did. Is China really going to be any different? Is this not the business cycle at work and human folly magnified by official hubris?

All emerging markets are prone to especially dramatic business cycles. It is partly due to a lack of diversification. It is partly due to a lack of past experience to temper expansion plans. It is also due to corporate and government structures that allow uncontrolled expansion until it is too late.

Is the Shanghai property boom going to end like Dubai? Sure it is. Shanghai has had several violent real estate corrections in the past decade. They all bounced back but this time could be different as the Chinese export machine is severely compromised by a weak global economy.

Source : http://www.seekingalpha.com/