The new Shanghai (and Chongqing) property tax is creating some fascinating discussions in the Mainland. Maybe it will eliminate speculation? Maybe it will bring down rising property prices? Maybe it will alleviate the real estate bubble? And so on. But this is now my third real estate bubble in eight years. First, the Middle East, then the US and now China. I’m getting a bit tired of this story.
Eternal investment truth #1 is that “real estate gets sick but never dies”. You may lose some money or have to wait out a bad market. But, assuming you didn’t use too much debt, you still have your building and your investment won’t go to zero. It’s hard to die in real estate.
Eternal investment truth #2 is that lots of capital always means lots of demand for real estate. If there’s lots of money floating around, real estate in premier locations, such as London, Tokyo and Shanghai, always goes up. And if it’s also an island, say New York or Hong Kong, then the prices really, really go up. In the petrodollar-filled Middle East, it seems like half the population quits their jobs and goes into real estate every time the price of oil hits $90 a barrel.
Shanghai real estate today is a perfect storm of truth #1, truth #2 and the fact that there are few other investment options. There is really a lot of economic power behind the surging Shanghai real estate market. So it’s pretty hard to believe that the new property tax, which is small, is going to have any impact on prices or change many people’s behavior.
But Shanghai in 2011 reminds me not of the US boom, but of Dubai around 2005. Back then I would drive along central Sheikh Zayed road and, just like Shanghai’s Century Avenue today, notice a new skyscraper almost every month. I would be continually startled by grand new projects. New Palm islands doubled the effective coastline. Ski slopes moved indoors, hotels went underwater and buildings started to rotate. And apartments seemed to be flying up everywhere. Very similar to Shanghai today, every family I knew owned several apartments around town.
Most importantly, Dubai then, like Shanghai today, was mostly about the two mentioned truths. It was overwhelmingly a story of lots of local capital searching for somewhere safe to go.
But I don’t think Shanghai will suffer Dubai’s fate. Dubai’s problem was it was very dependent on European and Russian homebuyers flying in. And the market collapsed because in one month in 2008 most of them went home. Demand dropped by 50% in just a few weeks. Thousands of leased cars were left abandoned at the airport. Palm islands and other massive projects were halted mid-construction. The shopping malls became ghost towns. It was actually pretty spooky.
Shanghai does not have this problem. 50% of city is not going to move away one month. Buildings may be vacant but the demand is real and local.
Shanghai’s real estate problem is both better and worse. It will not collapse like Dubai. But the rising home prices are making life less affordable for significant segments of the city’s population. That problem doesn’t have an easy answer and I am very sympathetic to the officials and economists who grapple with it (fortunately as an investor its not my problem). Hence the new property tax. Hence the increasing restrictions on how many homes Shanghai and non-Shanghai residents can buy. Hence the increasing down payment requirements. And so on.
I think the most important difference between the Chinese real estate bubble and those in the US and in the Middle East is that people see this one coming. The Dubai collapse was completely unexpected. It hit the city like a sudden typhoon. And even Warren Buffett says he didn’t see the US sub-prime mortgage crisis coming. It’s the unexpected crisis, the black swans, which can wipe you out. And this is likely the most important aspect of Shanghai’s new property tax. It shows that the government is actively preparing for a possible real estate bust – in a way that neither the US nor Dubai governments did.