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Reality Check on Shanghai Housing Prices

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To a large extent, the Chinese economy growth in recent years is attributed to the growth in the real estate market. Ten years ago, when I left Shanghai for graduate study in US, I remember most people still live in the apartment assigned by their “Danwei”.

Nowadays things are totally different. These days the National People’s Congress are debating about the “laws for property rights”. Real estate tax is also on the horizon. The average housing price in Shanghai is about CNY 10,000 per square meters. Many people who already got the property appreciation felt happy; while those who missed the boat (a.k.a, people like me) felt left behind. Goverment are trying to crack down the “house flippers” by imposing tax for people who don’t stay in a house for 5 years. But fundamentally, I don’t think the housing prices in Shanghai will fall. The reason is: there is huge demand for “rent”.

When I walk on the street, I see the realtors (plus rental office) everywhere. Although many people are still waiting for the price to fall, they need to find a place to live. More and more people come to Shanghai for job, from expats, Haigui, to fresh graduates, to migrant workers. The rental market especially the small unit near subway (metro) is very hot. For instance, the one bedroom apartment I live is very close to metro No. 2. Curious about the price, I asked the broker. He told me the owner won’t sell, and the market price for the 40 sqm unit is about CNY 480,000. This is still reasonable compared to the monthly rent CNY 2,000 (about 240 times). From what I read, typically in developed countries the housing price is about 200 to 300 times monthly rent, let’s call it price rent ratio (in corresponding to the Price Earning ratio in stock). Similar to stocks, housing prices are supported by the rent. 

So as long as people continue to flood into Shanghai, the housing prices are unlikely to fall.  

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