There have been numerous articles about China’s real estate bubble as it has became clear to almost everyone involved that prices will need to slow down drastically. As it was the case in the US, chances are good that this slowing down will end up being a major collapse. Even the Chinese government is being very active right now trying to cool this overheating market with some prices having increased by over 50% in 2009 at the same time US prices were cooling off. China’s government now demands a 50% down payment for purchases of land. “China is clearly in an asset bubble. It’s almost like it didn’t learn its lesson,” said Nariman Behravesh, chief economist for IHS Global Insight.
How bad is it?
Prices in cities like Shanghai are out of control. Imagine this. Prices are estimated to be on average 27 times higher than the yearly income of its citizens, 5 times greater than the world overage. Also, the price to rent ratio, another clear number is now at 500!! So owners of property in a city like Shanghai better be very fortunate because they will not be able to rent out at a price even close to the necessary to pay off their mortgage. There are 30 billion cube feet of commercial business under construction, a staggering number.
You can get more details in the following video from CNBC, a variety of subjects are discussed including China’s overheating real estate with guest James Chanos who compared China’s real estate to Dubai’s (having in the past it was 100 times more important):
Investing on the collapse of any bubble can be very difficult as bubbles usually go on for much longer than we could ever anticipate. This makes it very difficult to be short as losses can go up very quickly. I would say that you should never put too much of your capital on such a bet because you might have to see real estate prices go up another 20-30% or maybe even more before they start cooling off.
How to invest?
The very tricky part is investing if you think that China’s real estate is going to be to find the right way to do it. Unfortunately, there are no easy ways to do so as no ETF’s currently give a short exposure to China’s Real Estate Market. You can either use an ETF that will give you a short exposure to China or a short exposure to real estate (not specifically China). If you are able to have short positions, you could also have a short on TAO, the Claymore China Real Estate ETF.
Here is a summary of the possible ETF’s:
Ticker Name Market Cap (M) Price Return YTD Fees
CZI Direxion Daily China 3X Bear Shares 12.15553 34.73 -20.783 0.95
TAO Claymore/AlphaShares China Real Estate ETF 52.12447 16.0878 -9.824 0.78
YXI ProShares Short FTSE/Xinhua China 25 5.057051 50.57 N/A 0.95
FXP ProShares UltraShort FTSE/Xinhua China 25 448.4614 42.53 -2.312 0.95
DRV Direxion Daily Real Estate Bear 3x Shares 70.1675 6.35 -49.80047 0.95
REK ProShares Short Real Estate 4.548046 45.48 N/A 0.95
SRS ProShares UltraShort Real Estate 438.0436 25.198 -32.667 0.95