Andy Xie on the housing bubble

Animal Instinct on China's Real Estate Range
At the root of the property bubble are negative real interest rates. China's bank deposit rates are extremely low: 0.36 percent for demand deposits and 2.25 percent for one-year deposits. These rates are set against a backdrop of rising inflation fueled by a tight labor market and skyrocketing prices for government-owned land.
There are occasional fads and manias and herd behavior, but every single great financial bubble was supported by credit.

This will be the first year in a long while that household debt rises more quickly than household deposits. In other words, China's household sector will reduce rather than increase its liquidity in banks. That makes the banking system more dependent on hot money for liquidity and the system vulnerable to shock.
This is exactly what happened in Hong Kong, South Korea and Southeast Asia a decade ago. Their banks were quite dependent on hot money to support lending growth. When the shock came and foreign liquidity was pulled, most banks collapsed. Hong Kong's banks remained afloat due to strong capital bases. Still, interest rates had to be raised forcefully to maintain liquid positions. These high interest rates, in turn, popped Hong Kong's property bubble.

China's household debt level is getting close to the danger level. Even if the growth trend moderates, debt is likely to surpass 15 trillion yuan in 2011, equivalent to about 100 percent of urban labor income. More importantly, China's household debt is a new phenomenon. For it to rise so fast to such heights rings alarm bells. Experiences from other countries show that whenever household debt rises at such a rapid pace and to such high levels, delinquency rates are likely to go up – a lot.
Andy offers some solid long-term solutions to housing and he's sticking to his 2012 target of the global bubble bursting.

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