JAMES CHANOS: Well, again, the perception seems to be that China will grow into this real estate problem. But there’s a problem with that argument, and that is the real estate that’s being built is not being built for the masses. This is not affordable housing for the middle-class. This is high-end condos in major urban areas and high-end office buildings.
Just to give you an idea what price ranges are like, right now construction costs in China are starting to hit $100 to $150 per square foot in some of the cities. The typical Chinese condo is 100 square meters, about 1,100 square feet. So that means a condominium with no floors, no walls and no appliances costs the average Chinese two-income couple USD$100 to $150 per square foot.
Now, you do the math. Incomes are about $3,500 per capita in China, urban areas slightly higher. A Chinese two-income couple in their 30s probably makes combined $7,000 or $8,000 a year. Even if they were making $10,000 to $15,000 a year, they couldn’t carry a $150,000 condo. This is very similar to someone making $40,000 in the U.S. at the height of our bubble and buying an $800,000 house. And we know how that ended.
Chanos, the founder of Kynikos Associates Ltd, has a terrific track-record. He makes some compelling points, especially about commercial office and retail real estate. However, I am not convinced by his bearishness about residential property, and I think he is making a mistake by looking at China as one unified real estate market. There are significant variances between cities, and I think Chanos is underestimating the poor quality of current housing (has he spent a night in local Beijing housing yet?), the pent up demand to upgrade, and the increasing urbanization of rural suburbs.
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