The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Deja Vu…..Not This Time


Back in 1986, I was a Vice President with Citibank out of New York, and based in Dallas. With no data to go on, except a general sense of unease about the possibility of serious over-building, I rented a large van for a full day and invited all the best bankers I could to spend a day . . . sightseeing in our hometown. Collectively, we came to the judgment that the office building market in the North Dallas market and the condo market in far east Dallas were headed for big trouble. Fortunately, we immediately stopped lending to those markets. Because we knew there had to be “spillover” damage, we reduced overall lending all over north Texas.

For the last few days, I’ve remembered that experience, as I’ve driven around east China with businesspeople from the Chamber of Commerce. We are seeing an awful lot of construction, epic levels of construction in fact. There are countless “see-thru” buildings. I’m told that one of every three construction cranes in the world are working in China and have been for many years. Based on our experiences back home, most Chamber leaders think China is headed for big real estate problems.

I’m not so sure. Remember: The PRIMARY function of the Chinese government is to prevent social instability and thereby to remain in power.

One of the principle complaints of young professionals is the high cost of housing. Finally, after a long climb, residential sale prices in Shanghai have fallen about 2% since last year, to $2,971 per square meter or about $330 per square foot. Not surprisingly, sales are up 9%. Their unstated policy, I suspect, has been to increase the supply of housing enough to stop the inflation in housing prices. Even if they cause some deflation in home prices, it is unlikely to create a credit problem, since most mortgages require a 40% down payment, unlike the U.S.

Driving around north Texas in a van and east China in a bus . . . are very different!

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