Last updated July 31st, 2019.

 

“Buy low, sell high” is among the basic concepts of investing. Yet it’s truly surprising how many people seem to forget this mantra of value-seekers everywhere.

China’s real estate market was on a winning streak throughout most of the 2000s. In fact, local property buyers gained more than practically anyone else from the nation’s economic rise.

Homes in major Chinese cities saw the largest gains. Real estate prices in Shanghai, Shenzhen, Guangzhou, and Shanghai tripled between the new millennium and the 2008 Global Recession.

Something changed though. Property transaction volume since the “boom years” have entered freefall – especially in most of China’s first and second tier cities.

Meanwhile, Chinese real estate developers are cutting sales prices of their new projects – often by as much as 30%.

Rare signs of protest and public anger are showing as well. Would you be upset if you bought a condo, but prices dropped six months later giving new purchasers a better deal? That scenario is now a reality for some Chinese property buyers.

Furthermore, it’s all happening during peak season for housing sales. The locals normally label these auspicious months “Silver October” and “Golden November”.

You might think a website called “InvestAsian” would suggest buying property in China – Asia’s largest economy. But we don’t. Here are several reasons why you should not own property in China – especially if you’re a foreigner.

 

China’s Big Oversupply Problem

China boasts the world’s biggest population with nearly 1.4 billion inhabitants (although India will take that title by 2030). Nonetheless, there are plenty of houses available for everyone to buy.

Estimates place the number of unsold properties in China at over 50 million. That’s more than 1/5th of the entire country’s total private housing supply.

The government also curbed mortgage lending to reduce the number of speculative purchases and second/third home sales. Very few Chinese citizens are buying houses in order to actually occupy them anymore.

 

Second and third homes now make up a greater proportion of total residential sales than ever before.

 

China will soon face a demographic crisis on top of everything else. Its population will peak at about 1.4 billion inhabitants by the year 2035.

After that, China will rapidly age while shrinking in population size. Lower demand for housing will be just one of many negative repercussions

They’ll soon become the first country to ever grow old before reaching developed nation status – a dire situation for China’s real estate market its and economy as a whole.

I believe all those factors combined together will inevitably lead to a construction slowdown in China and/or a property crash.

 

Stocks Sink First, Then Real Estate

Equities in China have gone through a tough few years. Back in 2015, the Shanghai Composite Index was above 5,000 points. The index has since plummeted by half into the ~2,500 range.

China’s stock market collapse has not been reported as such by the media. Yet a drop of 50%+ is certainly more than just a simple correction.

Personally, I would call that a full-blown stock market collapse without any hesitation at all.

 

10-year chart of the Shanghai Composite Index between 2008 and 2018. China stock prices are selling below half their recent highs.

 

Why does the Shanghai Composite have anything to do with China’s property market? Because real estate values were only kept inflated by stock market outflows in the first place.

You see, Chinese investors firmly believe that property is a safe-haven asset. They’ve seen the stock market boom and bust cycles. However, real estate prices haven’t fallen ever since China began allowing private homeownership.

That’s a major reason why money began shifting toward property soon after stocks collapsed back in 2015. It’s also why Chinese real estate prices remained stagnant until recently, despite a stock market collapse and poor economic data.

In other words, China’s real estate bubble was supposed to pop several years ago. An outflow from the stock market simply delayed the inevitable.

Ever-stricter capital controls are geared toward ensuring that local wealth stays within Chinese borders.

Unfortunately, declining property and stock prices alike mean investors have increasing fewer Chinese assets left to buy.

 

Trade War: If Things Weren’t Bad Enough

The US-China Trade War officially began and will probably stay for a while. Many analysts think the situation will get far worse before improving in the long-term.

Shots have already been fired. China and the United States have each imposed tariffs on $250 billion worth of each other’s goods. But China imports almost exactly $250 billion in products from America.

Tariffs on China’s side are maximized. China therefore has only two ways left of responding to the United States. Each of those retaliation measures would harm their own real estate market though.

For starters, China could potentially devalue the Yuan beyond its psychological ceiling of 7.00 to the U.S. Dollar. This would obviously have a side-effect of devaluing any assets denominated in Yuan too, including all stocks and property in China.

Second, China might sell its U.S. treasuries. Yet this would make global interest rates skyrocket, in turn sinking the Chinese mortgage market, consumer spending, and real estate demand.

A trade war with the world’s biggest economy compounds China’s existing problems like falling asset prices and housing oversupply.

 

“Compared to the United States, China’s percentage of household savings in the real estate market is nearly triple.

 

Leaseholds and Foreign Investor Concerns

Putting all the above aside, fundamental problems with China’s real estate market do still exist. Major structural issues would remain even if economic and political conditions were better.

Foreign investors are especially harmed by Chinese real estate and investment laws.

One, you cannot ever truly own property in China whether you’re a foreigner a local. Every plot of land is technically owned by the state and can only be bought on a leasehold basis for up to 70 years.

This makes Chinese real estate a depreciating asset. If you (or any heirs) had to sell a house 50 years after buying it, the fact that just 20 years are remaining on your land use right would be reflected in the sales value.

Not only that, but foreign property buyers in China are severely restricted by law. Perhaps the worst limitation is that you must have already worked or studied abroad in China for one year and possess a long-term visa before buying real estate.

You may “own” a maximum of one apartment in China as a foreign buyer. Furthermore, you’re forever banned from renting it out and making any money off the property.

Many cities place additional limits on foreign real estate owners. In Shanghai, for example, you must marry a local Chinese citizen before owning property at all. Beijing demands that foreign purchasers show five years’ worth of tax returns.

Finally, owning property in China by itself doesn’t give you any right to live there as a foreigner. Compare that to countries like Thailand or Malaysia that give investors permanent residence.

Some foreign investors would like to actually live in places where they buy property, you know.

 

Foreigners Shouldn’t Buy Property in China

People often ask me a seemingly easy question: “is this a good investment?”. Whether they’re talking about property in China or something entirely different, I always answer these sorts of questions relative to other options.

After all, opportunity cost is very real. Why would you buy a high-risk, low return asset when there are thousands of superior options for growing your wealth?

I strongly believe that’s the case with property in China.

Asia boasts developed countries with less financial risk, where you can own freehold property while paying less money per square meter… and a permanent resident visa included on top of all that.

There are tons of better places to buy real estate in Asia as a foreigner. Depending on specific needs, you might consider thinking about investing in Malaysia, Cambodia, or the Philippines instead of China.

 

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About Reid Kirchenbauer

Reid Kirchenbauer is the Founder of InvestAsian. He's an international stock trader and property investor based in Thailand, Cambodia, and several other places. Reid manages the world's first and only frontier market real estate fund and has been featured in publications such as Forbes, Property Report, the South China Morning Post, and Seeking Alpha. You can download his free investment guide by clicking here.

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