Market Watch: Eyes On Shanghai

Shanghai's real-estate market is so strong, even tradition can't stand in its way. Young men used to buy large "marriage apartments" in which to live with a future bride, but can no longer afford them. So, they tell their shocked parents, they have to pool mortgage money with girlfriends and cohabit. Tales of speculators rapidly flipping tens, even hundreds of apartments at a time abound. "In recent years, the prices have gone up too fast," says Zhang Hongming, vice director of the real-estate center at the Shanghai Academy of Social Sciences. "Rich people all over the country and internationally are looking at Shanghai."

Beijing is watching closely, too, because a collapsing bubble in China's financial center could produce dangerous ripples across an economy that's now a leading driver of global growth. A closer look, however, suggests that the anecdotes about Shanghai are worse than the reality. House prices in Shanghai rose 15 percent last year, which was down from 24 percent in 2003, due in part to new rules imposed by the city and national governments. Those regulations discourage flipping by, for example, imposing a 5.5 percent capital-gains tax on properties sold within a year of purchase, raising mortgage rates for second and third homes, and monitoring fraudulent sales practices more aggressively. This explains, in part, why the 2004 price increase was in sync with the rest of China (14 percent) and other hot but not necessarily overheating markets, like Spain (17 percent) or France (16 percent).

The speculators seem to be contained, for now. A recent report by Andy Rothman of CLSA in Shanghai says that the real-estate market still has a "long run ahead of it." He says only about 17 percent of apartments sold in Shanghai are for investment purposes. (The comparable figure in the United States is about 25 percent.) According to CLSA and other data, only about 20 percent of the people who buy in Shanghai are from other places in China, and about 5 to 10 percent are foreigners, including expatriates living in the city.

So is buying in Shanghai a good idea? Most experts think that buying downtown is reasonably safe, just as it would be in other major international cities like New York, London or San Francisco. Neighborhoods such as Century Park and Xintiandi are popular for abundant green space and convenient access to public transportation, says Michael Hart, head of Shanghai research for Jones Lang LaSalle. The area to the southwest of Shanghai known as Hongqiao, where one of the city's airports and several international schools are located, is also reasonably stable. More adventurous investors might look at the riverside Hongkou district or the North Bund area, which is slated for redevelopment.

But Hart warns that Shanghai is still riskier than big cities in the developed world. One unsettling factor: apartments in the same price range can be shockingly different in terms of construction quality. "You might [find yourself] saying to an agent, 'This can't be in the same price range we just saw!' " Hart says. The risk in this view is not that of a classic bubble, but of rapid depreciation in poorly built sectors of the market. And, perhaps, in your spanking new bachelor pad.