China is one of the fastest growing economies in the world. However, it has had its fair share of ups and downs. It’s been a roller coaster ride for many investors who have plunged their money into real estate projects in China over the years. Properties in China have been selling well throughout most of the boom years, but there has been a rapid decline in values since 2015. In fact, there has been such a precipitous decline that many economists are now predicting that China’s real estate bubble will burst soon. Here are some reasons as to why you should think twice before investing in real estate in China:
The Chinese Real Estate Bubble Is About To Burst
The Chinese real estate market has been in a vast bubble for several years now. There have been several attempts to deflate the bubble and reduce the property prices, but none of them have worked so far. This is evident from the fact that the prices of real estate keep increasing every year. It’s becoming increasingly difficult for people to purchase a property. The Chinese government also has realized the looming threat of a burst real estate bubble. The government is making efforts to curb this threat by introducing new laws and regulations that will prevent any further increase in property prices and reduce the number of transactions.
Interest Rates Are Too High
Real estate prices are driven up by high interest rates. This is one of the reasons why the Chinese real estate market is in a state of doom. People are not investing their money in real estate anymore due to high interest rates. People prefer to invest their money in financial products like mutual funds, insurance policies, and government securities due to the low interest rates. Real estate can’t attract the same amount of interest as other financial products. Chinese banks have also reduced the interest rates on loans. Individuals can now borrow money at a 10-year low. Banks have also stopped offering home loans with 15-year repayment terms. This has severely impacted the real estate market in China.
Lack of Transparency in Real Estate Deals
Real estate deals in China are not transparent and adhere to local laws and regulations. This results in a high level of fraud. It is often observed that a particular property will go for a low price in a particular area, due to which interested buyers from other cities rush to that area. This creates a shortage of properties in the particular area, which in turn drives down the price of the remaining properties in that particular area. This type of unethical business has severely damaged the reputation of the real estate sector in China. Several companies and organisations have been blacklisted by the government for being involved in fraud. People now ask a great deal of questions before they invest in real estate projects in China.
Changes In Chinese Tax Laws
Real estate sector in China has been running into a lot of problems because of the changes in Chinese tax laws. At one time, people were getting a huge discount on the purchase price of a property by paying off a small amount of the loan amount. The loan amount was used as security for the loan. This was done to make the deal a little more transparent. As the demand increased, the government found out that this was encouraging black money transactions. It was then decided to implement a uniform property taxation law. This law gave the government powers to tax the entire property value without the owner getting any tax break. This resulted in a huge number of people selling their properties at a loss and moving out of the city.
Restrictions On Foreign Property Owners
Real estate prices are declining in China because of strict foreign ownership policies in the country. In the past, people with foreign passports were allowed to own residential properties in major cities. This is no longer the case. Foreign citizens are now allowed to own properties in rural areas, but they will have to pay a high amount of taxes on every sale or transfer of the property. Real estate prices have dropped drastically in rural areas due to this high tax policy. The Chinese government is also considering another amendment to this policy, which will make it mandatory for all rural properties to be transferred to eligible residents. This will severely affect the foreign investors in the Chinese real estate sector.
Real estate prices in China are declining rapidly. This is a result of several reasons, including changes in tax laws, high interest rates, and restrictions on foreign ownership of properties. It is a good idea to invest in real estate projects in China only if you are ready to take on a lot of risk. Real estate projects in China are not a good investment for long-term investment. It’s better to wait for the market to recover before you enter the real estate sector.