January 6, 2014

An Overheated, Investor-Driven Market

The Phnom Penh Post reports on Cambodia. “A new report by SBI Royal Securities is taking a bullish view on the investment potential of Phnom Penh condominiums for high net-worth locals and residents or investors from overseas. Prime real estate in major cities in Cambodia was at the more affordable end of the spectrum, averaging $3,200 per square metre, the same as Indonesia, and just slightly more expensive than Malaysia at $2,800 per square metre. De Castle Royal condominiums development are currently selling for between $130,000 and $950,000 depending on size and amenities. ‘High-class facilities, luxury high-end furnishings and excellent interior and exterior designs are of course key attractive elements of De Castle Royal,’ said SBI Royal Securities senior associate Leng Vandy.”

The Sydney Morning Herald in Australia. “Tiffany Liu, 27, is a Shanghai socialite who wants to buy a house in Sydney by the water and in the coolest neighbourhood. Her budget is between $2 million and $5 million. Jack Yin is the head of property development company Brandmont, based in Hebei province. He is looking for investment opportunities that could double as a small holiday home for his family and friends. Ms Liu and Mr Yin were joined this week by about 6000 similarly cashed-up shoppers at the Luxury Properties Showcase in Shanghai to browse some of the world’s most expensive homes.”

“‘It is China’s private individuals who are the biggest investors in Australia,’ said Adam Wu, chief operating officer at China Business Network. ‘Our personal savings are the highest in the world. ‘We have private savings worth $US10 trillion and that money needs to be invested somewhere, and the property restrictions to only one house for each family makes Australian property an attractive option.’”

The Epoch Times. “China’s skyrocketing housing prices are driven mainly by the Chinese regime’s policies, which help Communist Party members make huge profits by selling off land and by the investment of speculative hot money. Foreign currency must be exchanged to the Chinese yuan before it can be used for investment in China. Data from the Central Bank of China shows that at the end of of third quarter in 2013, the funds outstanding for foreign exchange reached 27.51 trillion yuan (approximately US$4.5 trillion).”

“Zhang Tingbin, founder of CNYUAN Thinktank, said after speculative hot money was converted to the Chinese yuan, it went to the financial institutes first. Then, the commercial banks would increase their lending efforts, in turn boosting the already high housing price. The relation between the commercial banks and the real estates is that they are connected with wealth investment products and trusts. Within this model, real estate developers and speculators all get what they want. Speculators get a 5 to 15 percent return, sometimes as high as a 20 percent annual return, with additional profits from the appreciation of the Chinese yuan.”

“At the same time, local governments reduced the supply of available lands. The resulting higher land price would in turn drive up the housing price. So in brief, speculators, real estate developers, banks, and local governments are working seamlessly together to raise housing prices, and then pass on the additional costs to the house buyers.”

Want China Times. “Taiwan’s finance minister, Chang Sheng-ford, warned that the country’s property prices are too expensive, and the property bubble may burst any time, reports our sister paper China Times. The possible housing bubbles will focus on those areas with high vacant housing rate such as Taipei, New Taipei, Taoyuan and Taichung, he said.”

“Sway (pseudonym), a local property expert, questioned the government’s actions, however. ‘Since the government knows it, why does it do nothing?’ he said, adding that Taipei’s property prices have tripled in the past 10 years.”

From DNA India. “Shashank Jain, executive director, PwC India, says the housing sector is facing many perils. Q: Only property investors might reap higher returns. But end-users incur rental and EMI (equated monthly instalment) expenses while fighting inflation. A: Yes, end-users are significantly impacted. Unfortunately, majority of buyers are not end-users. It’s a vicious circle. Investors are indifferent to project delays as they help them get better appreciation.”

“According to quarterly home registration data, a large proportion of transactions is secondary sales. In any micro market, if the secondary rates are Rs1,000 to Rs1,500 per square foot lower than what the developer is offering, that’s a clear sign of an overheated market, an investor-driven market.”

The Financial Post. “Douglas Porter, chief economist at Toronto-based BMO Capital Markets, said the Bank of Canada under governor Stephen Poloz has ‘learned to live with high home prices. After years of scolding Canadians and warning about the perils of record debt levels, the bank was flatly calling for a soft landing in housing by the end of the year, and downplaying talk of a bubble.’”

From First Post. “So what explains such fast rise in real estate prices all over the world? Most of the western world is going through a phase of very low economic growth. Given this incomes haven’t been rising. In fact, they have been falling. Given this, it is only fair to say that there is a housing bubble on. And the only possible explanation for it is the easy money policy run by governments and central banks all over the Western world to revive economic growth.”

“It needs to be pointed out here is that land is really not an issue in countries like United States and Australia. And this reflects in the numbers as well. As Alan S. Blinder writes in After the Music Stopped ‘The historical comparison reveals a stunning—and virtually unknown—fact: On balance, the relative prices of houses in America barely changed over more than a century! To be precise, the average annual relative price increase from 1890 to 1997 was just 0.09 percent.’”

“In the United States, the 20 City S&P/ Case- Shiller Home Price Index, the leading measure of US home prices, rose by 13.6% in October 2013, in comparison to a year earlier. Prices in London have also been going up at a very high rate. As Albert Edwards of Societe Generale writes in a recent note titled Here we go again…and once again no-one is listening.”

The Canadian Free Press on the UK. “The Conservative Government’s help-to-buy scheme may be well intentioned, but it runs the risk of fuelling a housing bubble as property values rise and banks lend more aggressively because of lower risk. The likelihood is that prices will be forced upward and that some householders will have bitten off more than they can chew. As a result government money will have to be diverted to the banks. This threatens to produce a repeat of the economic catastrophe seen in 2008.”

“The higher housing market will then become unsustainable, people will find themselves underwater in their loans, and a whole new housing crisis will be ready to kick-off. Politicians will meanwhile blame one another. Government needs to leave the marketplace alone. Only when that happens will prices reach their proper levels and people will pay what they can afford, with lenders loaning money based on appropriate risk.”

Bits Bucket for January 6, 2014

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