Chinese real estate bubble?

Like so much economic analysis, opinion on the current real estate boom in China shifts on a weekly basis like the winds of the Gobi desert. This week's pundits favor the bubble theory, suggesting that there is a bubble and the central government is stepping in. The China Daily goes so far as to title their piece, Real Estate Time Bomb Ticking! Of course, the reality of the situation, as well as the substance of these same published articles, is more nuanced.

The surface statistics point towards symptoms of a bubble; rapidly rising prices, greater inability of the middle class to purchase homes, and trend of developers to sell pieces of newly completed properties as strata-title to the highest bidder. Defenders of the real estate market point to the "China story", which is demographics (1.3 billion people!) and urbanization.

I see the central government's tight grip on financial markets as being the key here. The central government is able to control capital flows to each industry, including real estate, and does so to both induce a boom and to deflate a bubble. As complaints from the middle class increase, one sees signals that the central government is applying the brakes; some key and recent instructions include - all non-real estate SOE's need to submit exit plans from real estate investments, increase of down payment required for second homes and investment properties, and articles in government news organs focusing on potential real estate bubble.

One must not forget that the central government still has several instruments to prevent the collapse of real estate prices, not least of which is pushing forward REIT and CMBS markets, thereby drawing in more capital.

On a final note, one concern I harbor is the central government's ability to keep local governments and prefectural governments in line, and preventing a potential blow up in one region's real estate market to infecting the nation.