The red hot Chinese real estate market continues to soar even though the country's government is hoping to slow things down to avoid a bubble reminiscent of the US housing bubble. In August, property prices came in 9.3% higher than the year earlier. Citigroup put out a report that estimated a 28% increase in transactions during the month.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

Since 2002 land prices have rose tenfold over all and in certain cities the prices have increased about 30 times over. Still money continues to flow into real estate all around the country from the major cities to speculative land that may one day pay huge dividends. All the numbers point to an eventual bubble and recently one more indicator showed up when Chinese online real estate website SouFun Holdings began trading in mid-September to a warm welcome. It could be the signal of the end for the China real estate market.

When companies go public and soar on their first day in a sector that is already mature, it can be a signal that the trend is either slowing or about to burst. So when SFUN gained 73% on its first trading day, the red flag immediately went up for me. The stock and sector could continue its run in the near-term, but the probability of a pullback in the near future is high and investors should be aware of the potential drop.

Real Estate Competition
Already trading as an ADR in the US is the leading provider of real estate information online, China Real Estate Information (Nasdaq:CRIC). During the company's most recent quarter, earnings only rose 1.6% from the year earlier. However, revenues soared 96% with organic revenues up 21%. The stock has soared recently with the global markets, but remains well off its late 2009 high. A forward P/E ratio of 18.8 is fairly attractive, but this is based on the housing market boom continuing.

E-House China Holdings (NYSE:EJ) is more of a traditional real estate play because they offer the personal real estate services most are familiar with. They are also a property management firm that will be involved with developing communities.The stock has had a big run lately, gaining over 50% in the last three months. Even after the rally, the stock trades with a reasonable forward P/E ratio of 15.9.

Buying into the Sector
Investors that prefer to own the sector in lieu of an individual stock are in luck. The Guggenheim China Real Estate ETF (NYSE:TAO) invests in stocks and REITs that generate the majority of their revenue from ownership of land or property development in China. The ETF charges and expense ratio of 0.65% and is composed of 41 stocks that mainly trade in China, but are open to public investment. The ETF has had a nice year with a gain of nearly 10%, beating most averages. (For more, see Investing In China)

Bottom Line
Most trends eventually come to an end or hit a dull spot where they go sideways for months if not years. Right now the China real estate market continues to boom - however, it is just a matter of time before it slows down or halts. As we all know, when a bubble bursts, it hurts. (For related reading, see Why Country Funds Are So Risky.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  2. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  5. Stock Analysis

    6 Risks International Stocks Face in 2016

    Learn about risk factors that can influence your investment in foreign stocks and funds, and what regions are more at-risk than others.
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  10. Investing News

    Tufts Economists: TPP Will Reduce U.S. GDP

    According to economists at Tufts University, the TPP agreement will destroy half a million jobs in the U.S. by 2025.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center