Best of the Week
Most Popular
1.UK Housing Market Affordability, House Prices Momentum and Trend Forecast - Nadeem_Walayat
2.Gold and Silver Sector Big Green Light and Low Risk Entry Setup... - Clive_Maund
3.UK Regional House Prices, Cheapest and Most Expensive Property Markets - Nadeem_Walayat
4.US Dollar, CRB, Oil, Gas, Copper and Gold - The Chartology of Deflation - Rambus_Chartology
5.Silver Price, COT, US Dollar Updates and More - Dan_Norcini
6.Will Gold Price Drop Below $1000 Soon? - Brad_Gudgeon
7.UK Regional House Prices Analysis - Video - Nadeem_Walayat
8.Crude Oil Swinging For The Fences - A 20 to 1 Option Play - Bob_Kirtley
9.Fed’s Tarullo: U.S. Interest Rates Liftoff Should Wait for Signs of Inflation - Bloomberg
10.UK Immigration Crisis Hits New Extreme of 336k Net Migration, up 32% on 2014 - Nadeem_Walayat
Last 5 days
U.S. Dollar Remains the reserve currency of the world for a good reason - 1st Dec 15
Why We Won’t See Gold $5,000 - 1st Dec 15
Globalist Lockdown is here to Stay - 1st Dec 15
Bank Regulations Continue To Hinder The U.S. Economic Recovery - 1st Dec 15
Thanksgiving Amid the Terror Threats - 1st Dec 15
Collapsing Global Economic Trade - 1st Dec 15
Gold Demand in China Heading For Record and Reserves - 1st Dec 15
Stock Market Mixed Expectations Ahead Of December, New Economic Data Releases - 30th Nov 15
The First Prophet - The Day God First Spoke to Man - Video - 30th Nov 15
America's Rendezvous With Destiny - The Fourth Turning - 30th Nov 15
Stock Market Consolidation Week - 29th Nov 15
A Black Friday for Gold Prices - 29th Nov 15
Politicians Driving The World Towards War - Fourth Turning - 29th Nov 15
Stock Market Down Monday, Gold Price Bottoming? - 29th Nov 15
Turkey Downs Russian Jet to Draw NATO and US Deeper into Syrian Quagmire - 28th Nov 15
Stock Market Quiet Week as Primary 5 Continues - 28th Nov 15
Black Friday, Weekend for Europe's Migrants - 28th Nov 15
HUI and Gold - Who's Leading Whom? - 28th Nov 15
Gold And Silver - No Ending Action, But End May Be Near - 28th Nov 15
Social and Cultural Distress Dividing The Nation - Fourth Turning - 28th Nov 15
Sheffield Houses Prices 2015, Best Estate Agents As Rated by Buyers and Sellers - 28th Nov 15
Stock Market Top Valuations, at a Critical Juncture - 27th Nov 15
The Top Shopping Opportunity on Black Friday - 27th Nov 15
Economics Is About Scarcity, Property, and Relationships - 27th Nov 15
UK Immigration Crisis Hits New Extreme of 336k Net Migration, up 32% on 2014 - 27th Nov 15
Vauxhall Zafira B Fire Danger Recall - What to Do Video - 26th Nov 15
Triggers In US Dollar Collapse - 26th Nov 15
Apple Stock is a 10-Year Short - Bear Market Environment - 26th Nov 15
U.S. Federal Reserve Rate Hike - 26th Nov 15
George Osborne's War on Buy to Let Sector Trending Towards Doomsday - 26th Nov 15
Will Turkey Drag NATO into War With Russia in Syria? - 25th Nov 15
George Osborne’s Autumn Statement and Spending Review Full Text - 25th Nov 15
Will Fresh QE From ECB Boost Gold? - 25th Nov 15
Sheffield, Yorkshire and Humberside House Prices Forecast 2016-2018 - 25th Nov 15

Free Instant Analysis

Free Instant Technical Analysis

Market Oracle FREE Newsletter

Reasons to Get Excited About Japanese Stocks

BubbleOmics 101: China Does Not Have a Residential Property Bubble

Housing-Market / China Economy Aug 04, 2010 - 07:39 PM GMT

By: Andrew_Butter


Best Financial Markets Analysis ArticleBubbleomics 101:

1: Fundamental Price = Demand divided by Supply (Adam Smith)
2: If not – sorry folks…the market’s  not working properly (Albert Eintein?)

I’m not too sure about #2, but it might explain that awful-brain-wasting disease called “physics envy” that has atrophied so many otherwise brilliant minds.

How do you spot a bubble?

Simple, divide price by the fundamental and if that’s bigger than one you got a clue, the bigger that number is, the bigger the clue. If you want to run a check on your estimate of the fundamental work out the Depreciated Replacement Cost (DRC).

Well at least that’s what International Valuation Standards (IVS) says, and me I’m just a “paint-by-numbers” guy….I always do what IVS say, and when they say I must report Other Than Market Value rather than Market Value, well that’s what I do. Oh…and by-the-way they invented a BIG word for when the market isn’t working properly, they call it “disequilibrium”.

Of course there’s nothing new there, the first edition of IVS was published in 2000. Although sadly not a lot of people read it, certainly not the resident “bubble spotters” in USA, and most certainly not the blind-leaders of the blind-lenders in the Bank of International Settlements; that’s by-the-way, why they have credit crunches.

Anyway Chinas been in the “Bubble-News” recently. All those amateur bubble-spotters who failed to spot the US housing bubble are out in force, making sure they don’t get caught with their pants down again.

The logic is… well actually I was speed-reading and I kept nodding-off so I may have missed a bi…but I think the idea is that prices on new homes have gone up a lot, like really a lot, so that HAS to be a bubble!!

Perfect logic (for a physics-envier), and oh…silly me…sorry I forgot, there is something else…”USA had a housing bubble that started in 2000 and it popped in 2006, so that proves that China’s going to have one too! Because…Err…bubbles are infectious”?

Sorry to disappoint, but thanks to an excellent analysis of the housing market in China by Wu, Gyourko, and Deng ( ), you can work out what’s wrong with that logic on the back of an envelope.

Well pretty much, the way that goes is as follows:

The “fundamental” (what International Valuatuion Standards calls “Other-Than-Market-Value), can be roughly figured out from the demand (nominal GDP of China is a good first estimate (from Wikipedia and Google), and let’s assume the algorithm for the appropriate yield is a constant over the period – for the sake of argument), then you divid that by the urban population (also a bit of a rough number – kindly provided by  Wu, Gyourko, and Deng), and again, assuming for the sake of argument (rough numbers) that those people are living in housing units (however cramped) rather than in tents and also, that the bodies per unit remained constant.

Note: For an explanation about how all that works see:

OK that’s a lot of “wild assumptions” but I reckon it’s “good enough for a ten-minute back of the enveloped analysis; do the arithmetic, and this is what you get:

My (valuation)  opinion (done strictly in accordance with the International back-of-the envelope valuation standards (IBOEVS)) , house prices (in general) in China, are 85% of the “fundamental”, and that the huge price rise in recent years can be explained by:

1: Nominal GDP growing a lot faster than supply of decent new housing.

2: Market distortions arising from the fact that housing only started to be “privatized” in 1998 (and initially since there were no benchmarks it got sold to cheap – which is why you had to pay a kickback to a government official to buy anything).

i.e. the Chinese are waking up to the idea that they can afford to live in the cramped lousy apartments that the State provide with about 5m2 per person; and so they are “trading-up”.

Sure, in an evolving and chaotic market where the State and the Semi-State is still heavily involved (as is pointed out by Wu, Gyourko, and Deng ), there will be local areas of bubbles, and sure, some of the developers who didn’t know what they were doing and built “luxury” for a market that is much more pre-ocuped with air-conditioning and (indoor) flushing toilets, are going to get cremed, but that’s not a bubble, that’s just the market working.

Just how risky are China’s housing markets?

Yongheng Deng   Joseph Gyourko   Jing Wu
28 July 2010

Financial bubbles are governed by something like the economic equivalent of physics Heisenberg's uncertainty principle. It is impossible to observe a bubble with certainty without actually altering the bubble itself. If people knew it was a bubble, it wouldn't be a bubble – it would have already collapsed. It would not, however, be impossible to envision “diagnostic tests” that would provide a probabilistic identification of a bubble. Unfortunately the state of economics does not provide such a procedure (see Flood and Hodrick 1990 for an early analysis of what would be required to determine convincingly whether or not a speculative bubble exists).

I’m sorry to be sounding-off like an “obnoxious ass” again (as one kind commentator remarked recently), but my view on that exhibition of economic physics envy is that if you can’t figure out what a bubble is, and you don’t have a model that proves you can predict the dynamics of a bubble in at least ONE instance, then you shouldn’t be talking about the subject.

This is how you tell if there is a housing bubble, anywhere:

1: You work out nominal GDP per housing unit.

2: You plot that against price per housing unit.

3: If you want to be “super scientific” you divide that by a function of the yield (Y) on what is considered a 100% safe asset (in USA the 30 year treasury is a good benchmark – in China I have absolutely no idea what it is).

That get’s you to a formula which says:

Fundamental Price per unit = C1 + C2 x (nominal GDP per unit) x (function of1/Y)

That formula works out the fundamental in every housing market I have looked at and the constants (C1 and C2) are pretty constant whether you are in USA, UK, Germany, Hong Kong or Dubai (the function.

Divide the price per housing unit at the time by the “fundamental” and you can work out how big the “bubble” is (anything over 20% is not good, anything over 40% is alarming).

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2015 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


04 Aug 10, 21:07
China RE Bubble

"All those amateur bubble-spotters who failed to spot the US housing bubble..."

Actually it was the amateur bubble spotters who spotted and warned of the housing bubble and its collapse such as Ben Jones from housing bubble blog, Neil from real estate comments, Keith from housing panic, etc. It was the professional real estate experts who failed to spot the US housing bubble.


Sounds like the same fuzzy logic that led to the rise in CCDO and MBS.

Real world litmus test to determine if there is a real estate bubble in China-

Can a Chinese buyer afford the mortgage WITHOUT resorting to gimmicks from the lender, the government, the seller, etc? Can they afford to buy on their salary and still have money left over for food, bills, fun money, etc?

If yes, then there is no bubble.

If no then there is a bubble in the making.

Why make it so hard or complicated when the simple answer is not only the easiest to reach but also the most correct?

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Biggest Debt Bomb in History