Mar212014
Will China’s housing bust turn foreign buyers into desperate sellers?
A housing bubble bust in China may prompt Chinese investors to dump their California investment properties to generate cash to pay debts to Chinese banks.
Chinese citizens invest in housing because it’s one of the few investment opportunities available to them. Until recently, there were no property taxes in China, so it cost very little to own property, so many Chinese invested in real estate as a store of wealth. Once valuations became detached from any fundamental value based on cashflow, the Chinese housing market became a Ponzi scheme similar to the US housing market during our bubble — except that the Chinese bubble is much, much larger. Is it ready to burst?
A Chinese housing market crash could be even more disastrous than America’s
By Gwynn Guilford @sinoceros March 19, 2014
Investment drives China’s economy. And housing fuels a large share of that investment, contributing 33% of fixed-asset investment, says Zhang Zhiwei, an economist at Nomura—and, consequently, 16% of GDP. The decade-long housing boom that’s kept China’s GDP aloft has so far defied the bubble warnings, which began as far back as 2007.
But the building binge is finally catching up with China. Not just because sales are faltering (paywall). After building around 13.4% more floorspace each year, China finally has too much housing, argues Zhang in a note this week. The quirks of China’s economic model mean that a housing crash will be more devastating for the economy than many realize. …
But housing supply is tricky to make sense of when, thanks to China’s closed capital account, apartments are traded like stocks. Despite reports of housing gluts in smaller cities, many take heart in the fact that sales in first-tier cities—Beijing, Shanghai, Guangzhou and Shenzhen—remain robust, thanks to higher incomes among residents, and because people from other cities buy property in the big metropolises as investments. …
“This is comparable to when the US property bubble burst, since property prices did not collapse in New York, but instead in places like Orlando and Las Vegas,” Zhang says. “In China, the true risks of a sharp correction in the property market fall in third- and fourth-tier cities, which are not on investors’ radar screens.”
If China’s housing market crashes, the ripple effect could be even more cataclysmic for its economy than the recent housing market collapses in the US and Europe were for their economies. A fifth of outstanding loans and a quarter of new loans are to property developers, says Nomura; untold billions more have been lent out off bank balance sheets. As falling prices crimp margins, small developers—like the one in the news this week—will start defaulting.
But the fallout will be bigger still, says Patrick Chovanec of Silvercrest Asset Management. ”Not only is property important because it’s a key component of that investment boom, but it’s essentially the asset that underwrites all credit in the Chinese economy, whether it’s local government loans, whether it’s business loans,” Chovanec says, explaining that lenders require “hard” assets as collateral because financial accounts can easily be doctored.
This creates a circular system. ”All these loans are being made on the basis of property as collateral, which then goes into property and bids up the price of property,” he explains. “And then the property price—the price of the collateral—goes up, and you can get more loans. That’s a very dangerous cycle.”
That’s a Ponzi scheme. I wrote about this issue in depth in the post Would rental parity analysis in appraisals prevent another housing bubble? The problem is one of valuation: when the benchmark for valuation is only comparable sales, which it is in China and in our own residential real estate market, then each sale represents a higher comparable value justifying an even larger loan. There is no tether to real, underlying value as determined by cashflow. That makes for a dangerously unstable market because loan payments are not backed by rent. If a few borrowers become insolvent, the entire system crashes.
The housing bubble in China may finally burst. If it does, the fallout will be epic, and it may have global repercussions. Our own real estate market has enjoyed some influx of Chinese investment; I know because I live in a rental owned by a Chinese investor. I recently asked, Are the Chinese buying California homes in large numbers? The answer is: not really. In August of 2013, the OC Register published Foreign investors buying homes in O.C, and they reported that foreign buyers represent between 5% and 7% of the housing market.
But what happens if that 5% to 7% become sellers instead of buyers? What if the pretenders who borrowed their way to prosperity (yes, some Chinese did this too), what if they need the money to make debt-service payments?
The Music Just Ended: “Wealthy” Chinese Are Liquidating Offshore Luxury Homes In Scramble For Cash
Submitted by Tyler Durden on 03/19/2014 23:11
One of the primary drivers of the real estate bubble in the past several years, particularly in the ultra-luxury segment, were megawealthy Chinese buyers, seeking to park their cash into the safety of offshore real estate where it was deemed inaccessible to mainland regulators and overseers …
But more so than mere analyses which speculate on the true state of the Chinese record credit-fueled economy, such as the one we posted earlier today in which Morgan Stanley noted that China’s “Minsky Moment” has finally arrived, we now can judge them by their actions.
And sure enough, it didn’t take long before the debris from China’s sharp, sudden attempt to “realign” its runaway credit bubble, including the first ever corporate bond default earlier this month, floated right back to the surface.
Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.
Said otherwise, what goes up is now rapidly coming down.
Wealthy Chinese were blamed for pushing up property prices in the former British territory, where they accounted for 43 percent of new luxury home sales in the third quarter of 2012, before a tax hike on foreign buyers was announced.
The rush to sell coincides with a forecast 10 percent drop in property prices this year as the tax increase and rising borrowing costs cool demand. At the same time, credit conditions in China have tightened. Earlier this week, the looming bankruptcy of a Chinese property developer owing 3.5 billion yuan ($565.25 million) heightened concerns that financial risk was spreading.
“Some of the mainland sellers have liquidity issues – say, their companies in China have some difficulties – so they sold the houses to get cash,” said Norton Ng, account manager at a Centaline Property real estate office close to the China border, where luxury houses costing up to HK$30 million ($3.9 million) have been popular with mainland buyers.
Alas, as the recent events in China, chronicled in minute detail here have revealed, the “liquidity issues” of the mainland sellers are about to go from bad to much worse.
Those who don’t have issues with debt will likely be very happy they parked their money in California real estate, and they will hold their properties; however, the ones who ran personal Ponzi schemes will implode, sell their properties to meet their financial obligations, and potentially disrupt our real estate market in the process. If a significant portion of our demand suddenly becomes must-sell supply, that will not be a boost to home prices.
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Side story.
I was at a recent social gathering when the conversation (naturally!) turned to the local (Irvine) real estate market.
A gentlemen who is a local agent and apparently quite successful related that he is “absolutely convinced” that Irvine real estate in particular is going to see “double digit” price increases this year “because of the influx of Chinese buyers who want to get their kids into Irvine’s top schools. (ie. University High School).
Good grief. Such predictions seem a bit optimistic to me.
Why 2014? Did the Chinese just discover Irvine? Weren’t all the same factors in place when Irvine house prices were declining in 2007, 2008, 2010, 2011?
This is the kind of delusional, wishful thinking that passes for analysis. What’s worse is that this guy is in a position to influence the thinking of others who will make huge financial decisions based on his fantasies.
“…Why 2014? Did the Chinese just discover Irvine?…”
Not only that, those wealthy, Chinese families need to have kids that just happen to be of the correct age to enter high school.
Seems like a pretty specific demographic to me.
Time will tell, but I am certainly not going to turn blue holding my breath.
I’m sure this has been asked before, but wouldn’t it make more sense to send your kids to private school than pay an extra $100-200 grand to buy in Irvine? (Or just rent and get the same benefits, as our astute blogger has chosen to do.)
“…Or just rent and get the same benefits…”
I am a long time resident in Woodbridge and I have noticed that rents seem to teeter on the high end for that exact reason.
I don’t know the answer to your first question, and it is a darn good question.
The answer to your second question is they do. Many more rent than buy. We found that out when we were looking for a place to rent in the Uni High district.
Considering your first question again. The reason I would rather buy in a good school district rather than buy less and send them to a private school is because the money is better used as an asset, residential re with the education advantages built in, as opposed to an expense, education. At least that was our plan. We rented in a good school district with the intent of later buying a good district rather than buy less and spend on private. We ended up buying in a good district and sending our children to a private school anyways.
If I had it to do over again, would I do it the same? I dunno. Probably. We really like the neighborhood, and the public schools, and the school our kids attend.
California Home Sales hit six-year low
California single-family home and condominium sales fell 1.4 percent in February from January, and declined 16.1 percent from February, 2013. According to the Real Property Report from PropertyRadar, last month marked the lowest sales for the month of February since 2008.
“Rapid price increases and rising interest rates in concert with sluggish income and employment growth have slowed demand,” said Madeline Schnapp, director of Economic Research for PropertyRadar. “Tougher borrowing standards, elevated prices, increasing borrowing costs and historically low inventory continue to exert a drag on market activity.”
Although home sales volume decreased in California, the median price for a home in February increased by $5,000, or 1.4 percent, to $350,000. Median home prices have jumped 21.1 percent year-over-year.
Schnapp noted, “The uptick in median home prices in February means little as seasonal factors continue to impact both sales and prices. Given the lackluster sales volume, however, median prices are unlikely to see the rapid gains that characterized the first half of 2013.”
Negative equity is also on the decline—a positive note for Californians.
The number of California homeowners with more than 10 percent equity in their homes increased by 2.3 percent—nearly 120,000 homeowners in February.
“But, it is important to keep in mind that 1.2 million California homeowners, or 13.9 percent, remain underwater and will continue to create significant headwinds for the California housing market recovery,” Schnapp cautioned.
She continued, “In sum, the California housing market continues to improve, just more slowly than most analysts expected, given that we are in the fifth year of an economic recovery.”
Here We Go Again …
2014 Home Sales Depend on Strong Job Market
Growing optimism in the housing purchase market stems from faith in a strengthening job market nationwide. Recent snapshots of the national housing economy by Fannie Mae and Zillow cite job growth as a spur for more robust markets, particularly in western states, where new jobs and competition for houses are escalating home prices.
Now Freddie Mac has joined the chorus. In its latest Economic and Housing Market Outlook, released Wednesday, the agency expects home sales to grow along with wages this year, despite a still-tough job market in most sectors. Freddie is projecting a 3 percent rise in home sales and a 20 percent rise in new home construction in 2014, which the agency expects to level out to a 5 percent overall growth.
Freddie’s latest analysis paints a complex picture, particularly when measured against job figures from 2007, the last time the national job market was considered solid for the entire calendar year. Compared to then, most job sectors, particularly manufacturing and construction, are down. In February, construction employment was 5.9 million, 1.5 million less than December of 2007, according to Freddie.
But these sectors are on a steady rise, with construction at about 80 percent of its 2007 peak and manufacturing at about 90 percent, according to the report. Freddie’s numbers bolster Fannie Mae’s February report showing that construction jobs and the number of new houses built are up since the beginning of the year. And these factors are key to a healthier housing market, said Frank Nothaft, VP and chief economist at Freddie Mac.
“In order to have solid home sales in 2014 we need to see continued improvement in the labor market,” Nothaft said. “Manufacturing and construction are the two sectors that have been slowest to recover. With increased economic growth, these two sectors should start to improve.”
Considerable growth, according to Freddie, is happening in mining and office jobs, but particularly in education and health services, which has grown by 2.4 million jobs since 2007. Despite substantial progress, however, the labor market remains below its potential, and unemployment is stubbornly hanging on at 6.7 percent.
But these numbers are not as black and white as they may at first seem. While it may look bad that the employment-to-population ratio dropped from 62.7 percent to 58.8 percent in February, annual wages measured that same month grew by 2.5 percent, which is well above consumer price inflation.
Also, according to Freddie, about 40 percent of this drop-off was driven by baby boomers who have retired between December 2007 and February 2014. This may open the door for more jobs as boomers continue to leave vacancies in the workforce.
“With more jobs, wage growth should continue to accelerate, giving American households much needed income to help sustain the emerging purchase market,” Nothaft said.
Investors retreat from housing market as prices heat up
Investors, who have been an important chunk of the housing market’s recovery, are shrinking as a share of existing-home sales.
With spiking home prices (one gauge says they rose 13.4% in 2013), it’s harder to get an attractive deal.
“Not only are fewer deals available, but once found, the deals are not as sweet: as supplies of distressed homes contract, the discount has narrowed,” economists at IHS Global Insight wrote in a Thursday research note.
A preliminary estimate from NAR spokesman Walter Molony indicates that investment properties made up about 22% of home sales last year, down from 24% in 2012 and 27% in 2011.
When investors buy a property, they’re looking to make a nice return, rather than, say, a home that has enough room to accommodate a growing family. So it makes sense that 2013’s skyrocketing prices are slowing their purchases.
“We think a lot of the big pop in housing has gone out,” Stephen Schwarzman, chief executive of Blackstone Group, which has bought at least $7 billion worth of houses, said Wednesday on CNBC. “For us an exposure in the $7-to-$8 billion range is big enough.”
The low-price properties that investors liked to scoop up are seeing dropping sales trends, according to NAR data released Thursday.
Sales of single-family existing homes priced between $100,000 and $250,000 (this range includes the median price of $189,200) fell 7.2% in February from the year-earlier period. Meanwhile, sales of homes between $250,000 and $500,000 rose 1.9% over the past year.
Looking broadly at the existing-home market, dropping affordability and bad weather have cut sales rates in recent months.
“…the agency expects home sales to grow along with wages this year…”
Tweet: South Orange County to Sally and Freddie Mac
Exactly which solar system are you guys from?
The wage growth for [software] professionals who just happen to receive salaries that are anywhere near that required to purchase a home in South O.C are *not* getting wage increases.
To the contrary, global wage arbitrage is alive and well in the software business.
Maybe I am in the wrong career. Any other professionals out there [in other fields] who are getting significant salary increases?
Do we all need to become BitCoin traders?
No growth here. Went from approximately 12% annual increases year over year from 2007 through 2012, to nothing in 2013 and nothing in 2014. I can’t complain, it beats a reduction or not having a job at all.
“do we all need to become bitcoin traders?”
Only if there’s a way to short that rot.
Bitcoin is one of the most absurd concepts and flagrant scams ever invented. Only in our time could you convince so many gullible people that something is a “currency” that is A. accessible only online, when the electricity is on, and B. Issued and controlled by an anonymous inventor whose identity cannot be ascertained to this day.
Our own “fiat” currency seems pretty solid compared, not that that’s saying much.
“Issued and controlled by an anonymous inventor…”
bitcoin, issued by one person? …face-palm
She does hit on one of the problems with bitcoin: there is not effective way to short it.
Other fiat currencies aren’t nearly so volatile because big institutions and traders around the world are constantly arbitraging currency. If it becomes evenly slightly overvalued, the shorts hammer it back down. Bitcoin has seen wild swings in valuation because nobody arbitrages it, and there is no liquid market in which it trades. Until those problems are solved, no alternate currency is going to succeed.
This is hilarious! Are memories really so short? Is this an indication that home prices have topped out?
“As home values are rising, so are the number of Americans taking out second mortgages. When (and if) done right, it is a very savvy move in personal finance.”
A very savvy move in personal finance? Gosh, no wonder a schumck of average intelligence such as myself like me can make money.
“As a result, investors can practice a form of interest arbitrage.”
Investors? Really? Investors? How ’bout more like LOSERS?!
Did it ever occur to the savvy that the reason they can borrow the money in the first place is because the lenders want nothing more for them to “invest”? The lenders are more than happy to lend them money so these “investors” can buy whatever stocks the lenders are ready to sell.
3 Reasons To Tap Into Home Equity To Buy Stocks
It just occured to me that maybe this is also an indicator that the stock market is topping? “Investors” borrowing on their home to buy stocks?
It’s hard to know if it’s topping, but margin is at a record high and the recent volatility is a sign that bulls and bears are duking it out.
More like the bears are battling it out with Wall Street sell side firms and large investment houses flush with cash from the sales of Treasury and Agency Mortgage paper to the FED.
Whenever someone suggests it’s a good idea to borrow money to invest, I ask them where that money is coming from.
Isn’t it a professional investor who determined that loaning you money is the best investment they can make?
If there were many good investments out there returning more than the interest rate on your mortgage, wouldn’t these professionals by investing there instead?
People who fall for this don’t realize they are suckers, which makes them the very best kind.
Well, in effect, anybody that owns stocks while they still have a mortgage is doing this. I could be paying my mortgage down much faster but I choose to use that leverage to invest in assets that return higher than my mortgage rate (much higher after-tax). They key is managing your risk wisely, which the typical person taking out a HELOC isn’t known for doing very effectively.
You are also doing this with your Vegas properties, taking out loans at a lower rate than your capitalization rate.
It’s a little different if the investment has steady cashflow. In fact, the professionals realized it was more advantageous to buy rental homes in beaten down markets than it was to make loans, so the hedge funds bought thousands of properties.
As you noted, most people don’t take this money to invest in steady cashflow, they generally speculate with it on what they hope are appreciating assets — and most lose this bet, particularly over the long term.
“You are also doing this with your Vegas properties, taking out loans at a lower rate than your capitalization rate.”
To an extent, that is correct. And it is an business investment decision. There are reasons business investments are treated different than personal expense decisions. A business decision is best made using logical and accurate risk vs. reward analysis. If one treats a home like a business decision there will be conflict. A house, not, but a home, yes. Buying a home entails many factors that have nothing to do with logic and accurate analysis. I have 3 daughters. Do I spend the most money on the education of the one who I have analyzed will result in the best return of the dollar?
For me, a home is best paid off before retirement and maybe as soon as possible. I am not savvy, but I am probably more content than some. Ask some elderly their opinion.
We agree about that and I’m planning to be retired and have my house paid off by the time I’m your age.
Very true. That’s the whole dilemma when you have debt – Should I be paying this off as quickly as possible, forsaking all investing, or should I continue to save a bit each month and contribute to my 401k? If you’re holding assets and/or contributing to savings while in debt, you’re basically borrowing to invest.
“Well, in effect, anybody that owns stocks while they still have a mortgage is doing this. I could be paying my mortgage down much faster but I choose to use that leverage to invest in assets that return higher than my mortgage rate (much higher after-tax).”
Yes, you are a savvy and diversified investor.
“Isn’t it a professional investor who determined that loaning you money is the best investment they can make?”
Thanks, that is what I meant to say, but it seems that when I proofread, I only read what I meant rather that what I actually wrote.
I know this a concept only for the simple, but here goes: Debt incurrence is self-imposed slavery.
Admittedly, I have used leverage/debt speculating on the price direction of So Cal real estate, and I have no regrets. I don’t know if that is hypocritical or not, but I do know that I would not make that type of bet in this re market or the re market of the last 7 years. I might buy a house to live in, but I certainly would not bet on that house appreciating faster than currency devaluation. Maybe someone sees something I don’t, but from my observations, there are just too many unknowns right now to calculate the odds with any certainty.
If the currency devalues, I would rather borrower the money now and pay back the devalued currency later.
Since the financial media is out of excuses for housing’s poor performance this year, they finally acknowledge that their previous wishful thinking was wrong.
Home Sales Usually Pick Up in Spring, but This Year May Disappoint
The spring home-selling season really begins to ramp up in March, but there are signals that demand this year might fizzle.
February’s drop in existing-home sales was one ominous sign, especially since traffic reports — which are a proxy for home sales 30 to 60 days out — show a slump in buyer interest.
“The spring selling season is off to a weaker start than people in the industry had been expecting or hoping for,” said Tom Lawler, founder of Lawler Economic & Housing Consulting LLC.
To be sure, it’s still early in the year. The pace could turn around, and the brutal winter played at least some role in depressing the level of sales in February. But housing also is in the midst of a kind of gear-shifting that involves moving away from a market driven by cash deals and investors to one with fewer distressed properties, homes that are more expensive, and a higher share of regular buyers whose jobs and paychecks are the bottom-line for what or whether they buy.
One reason for the slump in existing home sales is that fewer investors are buying. But the same forces that are pushing away investors — higher prices, less to buy — have also soured some regular homebuyers.
A February survey of buyer traffic from Credit Suisse showed a marked drop from January, with declines in 42 of the 50 markets it tracks. Unlike data from real estate agent groups, which measure closings, the Credit Suisse data give a sense of where demand will be 30 to 60 days down the line — the heart of the spring selling season.
Of course, most U.S. cities remain very affordable, so buyers should come around eventually. Home prices are about where they were in 2004, and interest rates, while higher, are still low compared to decades past. For the most-recent quarter century Americans have spent about 25% of their income on mortgage principal and interest payments. Despite rising prices and rates, it’s only at 20% today.
The problem is that now that housing is getting closer to normal, the onus of the recovery has shifted to the normal issues such as job and income growth. Job growth was relatively steady in 2013, but has slowed down in the past few months.
Income growth has also been weak, and with rents continuing to rise, many potential homebuyers — particularly first-time home buyers — are having a harder time saving up a down payment.
Housing is profoundly healthier than it was a year ago, but as it shifts away from last year’s frenzy it will become more tied to the regular economy. And that’s still just so-so.
A February survey of buyer traffic from Credit Suisse showed a marked drop from January, with declines in 42 of the 50 markets it tracks.
It think this is the best evidence that weather did play a role. Were buyers in January so unaware of the price/rate increases from 8 months ago that it caused them to suddenly flee the market in February?
But isn’t this trend in the West as well were the weather has been fine just fine?
It seems to be split down the middle in the West, with half of markets showing an increase and half showing a decrease.
The recurring issue listed in almost every market nationwide is “lack of good inventory”.
http://www.northshorehomesonline.com/CS%20Realtor%20Survey_03-12-2014.pdf
What caused some to flee the market, or more likely, give up looking, is the taper in mortgage security purchase by the Fed? The lenders have lessened the amounts they are willing to lend by the amount of decrease in Fed spending. Weather don’t mean squat. Standards don’t mean diddley. Wage stagnation don’t mean nuttin’ if there is plenty of money to borrow. What the Fed subsidizes will increase and what the Fed decreases spending on, will decrease. Ask yourself why the ten year is still so low, even though the Fed has supposedly decreased it’s buying of US Treasuries. And then look at the Fed’s balance sheet for the last months since the taper supposedly went into effect.
The answer to your inquiry on why the 10 year is so low is you have to look at bond prices of the other sovereigns. The important bonds from the other countries are all at where the 10 year is or slightly higher and lower. This will put the break on rates rising at a very fast rate. The FED might pull back but other CB’s might or might not do the same. Rest assured rates can only go up in the near future especially the FED has made it clear that they stopped buying [for now]. Another aspect is the stock market is getting toppy right now and some of the smart money is running toward bond purchase so the FED understands that temporarily there will be a market for treasury and rates will not climb if the stock market stopped advancing.
I even dare to think that the FED want a stock market decline so they could unload some of their bond porfolio to investors seeking less risks after the taper.
China’s property prices appear to be falling again
CAN bubbles ever pop twice? In late 2009 the world began to worry about a Chinese property bubble, symbolised by Ordos, a newly built city, bereft of citizens, in Inner Mongolia. In the spring of 2010 China’s government broadened its curbs on multiple home purchases and mortgage borrowing. The following spring, prices in nine big cities fell at last, according to one widely watched index. “The Great Property Bubble Of China May Be Popping” declared the Wall Street Journal in June of that year.
This week the same newspaper cited “compelling signs the Chinese property boom is over,” noting that “Cassandras” have been predicting a crash for years. (The Cassandra of Greek myth could tell the future but was never believed. For China’s property Cassandras, things are the other way round: their direst predictions are often believed, but have yet to come true.)
Bubbles often go on longer than expected. This newspaper warned about America’s internet and housing bubbles years before they burst. What is unusual about China’s bubble is not its persistence but its prevarication. It seems to be bursting for a second time. Property prices did peak in 2011, as the Journal noted. But the following year, they started to rise again.
Prices are still rising in 69 of the 70 cities tracked by the official statistics (Wenzhou in Zhejiang province is the exception). But residential sales fell by 5% in the first two months of the year, compared with a year earlier. And other statistics paint a darker picture, points out Nomura, a bank, which believes that property now poses a systemic risk to China’s economy.
Nomura (among others) calculates an alternative property-price index by dividing the official figures for the value of housing sold nationwide (599 billion yuan, or $96 billion, in the first two months of 2014) by the floorspace sold (94m square metres). That suggests the price per square metre was about 6,400 yuan. By this (volatile) measure, prices fell by 3.8% compared with a year earlier (see chart). That has not happened since February 2012.
Falling prices would be a natural outcome of China’s frenetic pace of homebuilding. China now has almost as much floorspace per person as Italy enjoyed in 2009, Nomura calculates. GK Dragonomics, a consultancy, thinks China needs to build roughly 10m homes a year to keep up with the growing size and aspirations of the urban population (see article). Until 2011, China’s annual homebuilding was below that figure. In 2012, it surpassed it.
In most countries, that would be reported as good news. A rapid expansion of the housing stock means fewer people living in the boondocks or in urban discomfort. In China, however, this building frenzy is seen as an economic threat, not a triumph. One fear is that China’s developers are building houses for the wrong people (speculators) in the wrong places (backwaters). Instead of accommodating China’s overcrowded urban masses, too many houses stand empty, serving as stores of value for people dissatisfied with bank deposits and distrustful of the stockmarket. Another fear is that if homebuilding falls sharply, China may struggle to shift labour and capital quickly enough to avoid an abrupt slowdown in the overall economy.
But the first fear should allay the second. China’s building boom has left some parts of the country with too much floorspace and other parts with too little. Nearly half of all migrant workers still live in dormitories or on worksites. Where housing is oversupplied, prices will have to fall, inflicting losses on homeowners. But where housing needs remain unmet, scope remains for further construction to fill the gap. For example, the government has said it will spend more than 1 trillion yuan this year renovating shoddy housing. This will help keep homebuilders busy.
Realignment of the industry will be painful for local developers that cannot diversify across regions. These smaller firms have also suffered disproportionately from the government’s efforts to curb bank lending to the sector. Cut off from banks, they have borrowed at punishing rates from less regulated trust companies instead. Some went further. The biggest shareholder of Zhejiang Xingrun, a property firm, was recently detained for “illegal fund-raising”, local reports say. It has debts of 3.5 billion yuan ($565m) that it seems unable to repay. It would not be the first property default in China. But it would be one of the biggest.
Because China has misallocated housing, some parts of the country remain overcrowded while others remain empty. A bubble is always bursting somewhere, even as another inflates elsewhere. In China’s patchwork housing market, the Cassandras are never right everywhere but they are often right somewhere.
This is only a precursor as to what is going to happen in the bubble areas in America. Just think about this … The Fed has held interest rates to 0-.25% for several years, and added trillions to their balance sheet … the gov’t has added 7 trillion to the debt, yet all the inflation we can muster (per the gov’t) is a little less than 2%.
America has over 40 trillion in private debt … half of it will be written off as we erode back into economic depression. Deflation is coming, and it’s going to take all asset classes down with it … including Gold.
What could possibly go wrong? A high ranking government official has assured the public…
“State media last week quoted Vice Housing Minister Qiu Baoxing as saying that it is impossible for China’s property market to have big crisis within 10 years.”
First nominee for the Alan Greenspan Award!
China has a “shadow banking” system that is different from ours, but also problematic. They have lenders that are not formal banks but that loan money the banks have loaned to or invested in them, so if there are problems with these shadow lenders they will spill over to the regular banks. Think its hard to understand the financial statements of US banks? Hmmmmm…
When high-ranking officials start assuring everyone there is no problem, that’s the signal you should be very worried.
Very interesting. There’s a compounding factor in play too, no? Merely removing 5%-7% of buyers from the Irvine market has a big effect. If you also add 5%+ to sellers (experiencing distress and in need of cash), that compounds any effect China’s prospective bursting bubble could have.
It won’t take a very high percentage to have a big impact if we are flipping eager buyers into distressed sellers. It’s a double-whammy.
I enjoyed the Economist’s use of the Greek myth “Cassandra’s” in this story today “Double Bubble Trouble” re: China.
I’m surprised the “Cassandra” story isn’t used more on this blog. 🙂 (Power of prophecy but curse of not being believed!)
“This week the same newspaper cited “compelling signs the Chinese property boom is over,” noting that “Cassandras” have been predicting a crash for years. (The Cassandra of Greek myth could tell the future but was never believed. For China’s property Cassandras, things are the other way round: their direst predictions are often believed, but have yet to come true.)”
It’s an interesting read: http://www.economist.com/news/china/21599395-chinas-property-prices-appear-be-falling-again-double-bubble-trouble
Regarding our neighbors, the Chinese investors here is something to think about:
Although property values have increased exponentially in years past in China, one should be mindful of several structural differences that limit the ability of property owners to leverage themselves in the same way that Americans did during the past housing bust:
1) There are no second mortgages or ‘cash-out refi’ mortgages offered by Chinese banks. Chinese banks do not offer these products. This prevents owners from taking out additional equity and increasing the debt load over time as property values increase. Most Chinese owners tend to just pay down the mortgage because they have no other options. They do not look at their home as an ATM but as a long-term investment.
2) Cash Rich Chinese investors are just that: cash rich. The net effect of #1 above is that they did not borrow against a property in China in order to purchase in Irvine. They sold a property of substantially greater value and are now buying at a substantial discount here in Irvine with down-payments of 40 – 50%. They use the other cash to buy that BMW or Lexus RX 350 you see them driving..:)
Joe
[…] happens if deflating Chinese housing bubble or stock market bubble turns local real estate buyers into desperat…? Realistically, Chinese money is hot money escaping a collapsing market, subject to the policy […]
[…] happens if deflating Chinese housing bubble or stock market bubble turns local real estate buyers into desperat…? Realistically, Chinese money is hot money escaping a collapsing market, subject to the policy […]