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fools, and greater fools

’60 minutes’ investigates the recent development of Chinese housing bubble in the following video.

Following my previous posts (here, here, here, here and here) on China’s housing bubble, I am now re-organizing my thoughts, and starting to work out a formal economic analysis on China’s housing bubble.

Specifically, I will address the question if the current housing price in China can be justified by the story of China’s fast economic growth coupled with her fast industrialization and urbanization. My initial analysis clearly says no. I call this a ‘fools-and-greater-fools’ theory.  In history, great bubbles always came with even greater stories.  China is no exception.

Will keep you guys posted.

China’s housing bubble at its extreme

Ordos, the little known prairie city in China’s inner-Mongolia autonomous region, now has become the extreme example of China’s housing bubble. Due to extreme housing speculations and land sale (mostly grassland), loads of local farmers became instant millionaires: its GDP per capita recently surpassed Hong Kong; people with assets of 1 million Yuan (or $150,000) are actually considered “poor”; in 2010, 90% sale of Land Rovers (the symbol for power and masculinity in Chinese  taste) in mainland China found its buyers in Ordos…and imagine a cleaning lady driving a Toyota Land Cruiser to work?

I am shocked by this video news from SOHU (in Chinese):

You may also watch a similar Youtube video in English, but with less drama:

All this can’t be due to China’s fast economic growth. This is simply not sustainable. I see a classic asset bubble forming, reminiscent of many bubbles in history. It will burst eventually no matter what.

Locate China’s housing bubble

Housing market tends to be local.  It’s rare to see a nationwide price decline.  The recent US housing bubble is an exception and often considered a black swan.

People have been talking about China’s housing bubble for a few years now (see my previous post on China’s housing bubble debate), but where exactly is the bubble located?

The recent NBER research sheds some light on the issue.  The graph below shows the price-to-income ratio of China’s eight major cities, from 1999 to Q1 of 2010.

(click to enlarge, source: NBER w16189)

Beijing and Shenzhen are clearly in bubble-shape — the typical and familiar parabolic surge in price, and they are followed by Shanghai and Hangzhou.

Now, let’s have some comparative perspective.  How the same ratio compares to the major cities in the United States.

The graph below (courtesy of Infectious Greed) shows the price-to-income ratio of US cities. San Francisco, Los Angeles, Seattle were among the highest.

(click to enlarge)

At the peak of the housing bubble between 2006-07, the same ratio for San Francisco, the highest among all US cities, was around 11.   In contrast, Beijing has a ratio of 18, and Shenzhen at astonishing 22.