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China's real estate bubble more overvalued than US in 2006

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How do you say "tiiiiimber" in Mandarin?

The story of the real estate bubble in China isn't that much different than the bubble in the US during the Bush years. The government in both cases helped feed the bubble. What should be troubling for China is that the real estate market is now a critical chunk of the overall rise in GDP. (Again, not unlike the US before the bubble burst.) China's economy and to an even greater extent its stability is relying heavily on the high GDP growth rates. Those numbers are never sustainable but the consequences of a hard crash in China are much different than in the west.

The ruling government of China certainly knows that China has never in its long history had a peaceful transition, so this will be a very tense time once it starts. Americans gripe, Europeans march and in China, they revolt. Ten thousand years of history can teach us a few lessons and give us an idea what is ahead. CNNMoney on one analysis of the giant real estate bubble in China:

What amazed Aliber was the chasm between the prices of the apartments and the rents they fetched. A typical $600,000 unit brought a landlord less than $1000 a month in rent after expenses (assuming no mortgage). It wasn't the rental yields that attracted investors, it was the huge price appreciation, averaging from 20% to 30% from 2008 until last year. Rents -- the cost of living in the unit -- exercise a sort of gravitational pull on prices. That's because people won't pay far more to own a home than to rent a similar one, unless they think prices will keep soaring -- a view that's a sure sign of casino mentality, and never lasts. In China, prices in the frothiest markets are fifty or sixty time rents. That's the case with the example we discussed above, where the price is $600,000, and the rent is $12000, a ratio of 50-to-1. The 50 to 60 multiple is far above the level in most U.S. markets at the height of the bubble in 2006; in those heady days, a multiple of 40 was considered giant. So how far do China's prices need to fall so that the cost of owning is reasonably close to the level of rents? Aliber reckons that the rental yield on apartments will eventually go from less than 2% to 5%, or even a bit higher.

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