Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

Is Shanghai a Real Estate Bubble?

From Business Insider :

Look at this part:

One clear clue (regarding the rising real estate prices in China) is that the average price-to-income ratio in Beijing has reached 27:1, five times the world average, according to data from the Bureau of Statistics of the Beijing Municipality. In addition, the average price-to-rent ratio neared 500:1 in the city, far above the international alarm threshold of 300:1, which sends out a clear signal that the foundation of the real estate boom is losing stability.

What are the corresponding rates for India? Where I live – rents are approximately 25,000 per month and the house prices are 90 lakhs – a price-to-rent of 360:1, which is already “alarm” level. Price-to-income ratio though may be a more benign 5:1 – assuming most families where I live would earn at least 18 lakhs a year.

I have no idea of India-wide statistics or even Delhi-wide statistics.

  • Anoop says:

    >Hi Deepak,

    If China realty bubble busts, then should we expect the same reaction we saw in case of US housing bubble as now the world economic recovery is depending on China growth.

    What impact will India and its markets have though India growth story is being called home story in the short term and long term?? Will we have a chance to make money in the Indian markets if a knee jerk reaction is shown??

    Appreciate your opinion.

    Regards,
    Anoop

  • Anonymous says:

    >Price to rent in your example is 30:1 not 360:1; Or, price to income should be 60:1. Compare apples to apples and oranges to oranges, not apples to oranges.

  • DK says:

    >Chennai seems to be slightly better on this though (anecdotal evidence follows).

    House rent ratios are between 260:1 till about 400:1.

    However, I am not sure about your price to income ratio. I am not familiar with Delhi, but I would have thought an average of 18L per year is pretty high or maybe I have been out of touch with the reality (pun unintended :-))

    I see people here with 8-9L per year buying houses of 60L and above which brings the price to income to around 7:1 which is still lower than the "average".

    But don't you think these averages, which are mostly computed from EMEA and NA aren't really relevant numbers? I mean the demographics are different (population, fertility etc), the unemployment rate is different (EMEA has been averaging around 10% for a long time now, US has been around 5-10% for a long time, there are no statistics in India, but anecdotally speaking, in India no one knows someone who doesnt have a job), savings rate etc.

    I don't think the comparison to international averages is really relevant. What I would take from that article is that India still has a looong way to go before someone pricks the bubble.

  • Deepak Shenoy says:

    >Anoop: If China's bubble bursts the world will be impacted, just like Lehman. India will have it's impact due to reduced exports too. But it won't happen easily – there will be a series of trial bailouts for sure.

    Anon: Price to rent in this case is price to monthly rent, not annual (the author mentions 300:1 as the outer edge, which can only be a monthly figure) But correct me if I'm wrong – is the Chinese rental a 300:1 on price to annual rental?

    Price to income is based on annual income (usually median or mean incomes are measured annually, rent is measured monthly) And they are different measures – so you compare price-to-rent across geographies, or price-to-income – but do not compare the price-to-rent ratio to the price-to-income ratio (it's unlikely they'd be comparable)

    DK: I speak only of my apartment set which definitely looks like the 18L per year earners – it is of course different if you took an average of all apartments. And if you're right – the 8L earners taking over a 60L house – it must be a huge strain on finances; for a 60L house if one took a 48L loan, that's about 45K per month in EMI, which translates to 5.4L a year; leaving only 3L for expenses and taxes, must not be easy to live by.

    You may be right – the average NA/EMEA stats may not apply in the short term. But remember they have also had huge growth spurts and the longer term averages will hold (unemployment is high here too if you consider the overall economy, smaller towns and all that – we don't have stats yet though)

    You're also right that in comparison we have a long way to go before we reach Chinese levels or Japanese levels of the 1990s. But our bubble is a consequence of really cheap money too, and that culture might not exist for much longer. It's like saying when we had a market P/E of 28, which was high for us, China had it's P/E at 45+. But we still fell – so what's relative becomes absolute fairly fast.

  • Anoop says:

    >I think many 8L earners will not be going for 60L flat, as for many it is very unlikely to get the loan. Assume 8L is gross salary. They got to add the income of spouse and get the loan. So now it is 16L approximately.

    The only problem is that we don't have a way out of loan once taken and the property prices fall as is the case with US. We have to pay the loan in full.

    Do you have any idea about personal bankruptcy in India as in US?? is there any way to protect our other savings if we cannot pay out loan?? I heard about making trust or something. But I am not sure about it validity and usage.

    Regards,
    Anoop

  • Re/max Gujarat says:

    >Shanghai is a Real Estate Bubble, but in India real estate franchise also.

  • Dubai Property says:

    >I think that Chinese authorities must take immediate steps to avoid Shanghai real estate burst and learn lesson from what has happened with Dubai and Las Vegas real estate business. Chinese authorities have potential to cover upcoming Shanghai real estate industry crisis.

  • ada harriotts says:

    >While, what happened in Dubai must be avoided at all costs I do not see India in the same way. First there is no international investment in this market