Housing woes in the U.S. have been a hot topic of late, but two of the world's most populous countries may be in for a housing crisis worse than what the U.S. is experiencing.
Both China and India are watching real estate prices soar, leading many to question how long the market will last.
China for example, is boasting prices that would be considered absurd in the U.S. Three-bedroom apartments in cities such as Guangzhou or Shanghai are running for upwards of $300,000. These prices are especially high considering that the average salary in China is $160 per month, according to BusinessWeek.
One million residences were under construction in Shanghai in 2006
In Shanghai, some one million residences were under construction in 2006, which was just half the amount of new construction in the entire U.S. in 2004, according to the Houston Chronicle
. With Shanghai representing almost 20 percent of China’s property value, the bubble is seriously on edge, with many homes remaining empty.
Shanghai’s property vacancy rate is roughly 25 percent, well above the international average of 10 percent, according to The New York Times
Is the bubble already bursting? It would seem that the early signs are already there, as supply seems to be far outweighing demand at current prices. Morgan Stanley Asia-Pacific Chief Economist Andy Xie said he believes that the bursting of China’s housing bubble is inevitable, according to the Epoch Times (China). The Chinese government's delay in controlling their housing market, coupled with the rise in U.S. interest rates and a decline in personal savings in China, have all but forced the issue.
Another indicator of a serious issue is the difference between investments and purchase. China had a difference of 16.6 percent in 2003, surpassing the alarm level by almost 60 percent, according to the Epoch Times. The warnings that this bubble is serious seem to be in place.
China’s move to both urbanize and modernize, while helpful to the country's development, is quickly forcing real estate prices out of the realm of the average citizen. As of 2005, prices had already increased some 70 percent in just two years, according to the International Herald Tribune. If property vacancy rates continue to rise in response to high prices, a burst of the bubble will soon follow.
In India the story seems to be the same as it is in China: rising prices, massive construction and a bubble set to burst.
Much like China, India’s housing prices have soared, rising 16 percent a year for the last four years. In Bangalore and Mumbai, prices doubled in both 2005 and 2006, according to the Economist. Apartments in Mumbai now cost an average of three times more than in Shanghai, even with incomes in India much lower than those in China. According to the Economist, the question is not whether the prices will fall--but by how much.
Parts of India have seen real estate prices drop 20 percent in the last year
Recent reports have the fall already taking place, as New Delhi and other parts of Northern India have seen real estate prices drop some 20 percent over the last year, according to the International Herald Tribune
. Described as an erosion of confidence, stock markets have also been down as people have simply lacked the funds to put extra cash into the property market.
The Hindustan Times (India) reported a 50 percent drop in actual transactions in mid-2007, as property developers were forced to drop prices some 5 to 10 percent in order to bolster demand in some of India’s biggest cities. The demand for both modest and upscale residences has seen a sharp decline, especially for downtown luxury residences, where transactions seem to have hit a standstill.
There has been a decline in home loan dispersals and the State Bank of India reports a slow in expected growth because of the market's movement, according to The Hindustan Times.
The business of flipping properties for a quick profit is most likely over in India for the time being. Mortgage rates are increasing steadily in both Bangalore and Mumbai as prices have already begun to falter; however, as the Economist reports, other areas of Asia are seeing a continued rise in home prices.
Developers of all sizes are using price cuts to attract demand for properties, and as it stands, the housing bubbles in both China and India may have already peaked. Expect prices to continue to fall in order to avoid vacancies, and new construction to slow as the markets slow down.