February 19, 2014

A Very Dangerous Thought

Some housing bubble news from the Asian region. From ANN, “Financial policies in China are driving an interest in the Australian real estate market. Andrew Taylor, CEO of a Chinese language website listing international property from offices in Hong Kong and Shanghai, says the interest is growing. ‘Our user data shows that Chinese real estate buyer interest in Australia is up about 370 per cent on this time last year which is a huge increase.’”

“In the Sydney harbour suburb of Mosman, 30 to 40 per cent of sales over $3 million have reportedly been to Chinese buyers. John Lee, Adjunct Associate Professor at Sydney University, says this section of the market attracts the extremely rich who will pay above market rates. ‘There are capital controls in China, it’s very hard to take money out of the country. Buying real estate is one scheme that quite a lot of the ultra-rich in China have come up to get money out of the country into safe assets like Australian residential property. So it’s not so much that they want to own something in Australia it’s more that they want to get money out of the country,’ Lee said.”

“‘Much of it is illegal. So for example you might want to set up a false trading company overseas, you declare the money being sent overseas is for the purpose of trade when it’s actually for investment. And it’s been estimated that in the last 10 years almost $US4 trillion has left China through this kind of method,’ he said.”

The Malaysian Star. “The property market in Johor, particularly Iskandar Malaysia, might be a case of too much too soon. Red flags are showing in the state where launches of projects and high prices are common place but the pace of launches, which now includes ‘carpet building’ by China developers, is flooding the market with more houses than what could be sustainable. Latest data indicate the amount of new homes being built in the near future is equivalent to 42% of the stock of 702,101 houses in the state. Almost 300,000 near homes are being built or in the planning stage at a time when the market in Johor has hit a soft patch.”

“‘We welcome foreign developers including those from China, but flooding the market with massive supply of properties could create property overhang,’ says Johor Real Estate and Housing Developers Association chairman Koh Moo Hing.”

The South China Morning Post on Hong Kong. “If you could ask a crystal ball any question, what would it be? Landlords of Hong Kong luxury residential properties would probably want to know when they can find tenants to fill their vacant homes. Apartments in the prime districts of The Peak and Southside have been the most affected, with average rents dropping 10 per cent and 7.1 per cent, respectively, last year, according to property consultant Savills. The gloomy picture is likely to persist this year alongside a weakening office market as hiring dries up.”

“‘The situation is worse than expected. Last year, vendors of strata-titled luxury flats refused to lower selling prices, as they firmly believed that they could put the units out for lease in the worst case. As time went on, they realised the difficulty of finding tenants,’ the property consultant said. This year, some vendors are believed to be softening their stance on prices, and they may prefer to offer units for sale by cutting prices rather than hold them vacant without any rental income.”

The Hong Kong Standard. “Excessive production capacity is a ‘cancer’ for the mainland economy and the property sector would be the first to collapse, the deputy head of a top state-linked think tank has warned. ‘We depend on investment to improve economic growth. But the influx of investment will bring excessive production capacity,’ Chinese Academy of Social Sciences vice president Li Yang said. ‘All in all, the problem lies in defects in the system.’”

“Li expects a clearer picture on the oversupply of homes to emerge after a nationwide registration system is launched in June. ‘People avoid talking about the property sector but everybody knows there’s a big problem. And the problem is very serious, all the financial departments are preparing [for a decline in the property market],’ said Li, who believes the sector will be the first to suffer this year.”

China Economic Review. “Last year was a wild ride for the mainland real estate market. Prices coming off of a low base topped 20% year-on-year growth in some of the biggest cities. Transaction volumes rose to record levels. Yet amid the dizzying highs in cities such as Shanghai and Guangzhou, month-on-month price growth in many smaller cities across China began to slow starting in the second quarter. By December, prices were falling month-on-month in two cities and had leveled out in three.”

“Prices in Wenzhou, a major manufacturing hub in coastal Zhejiang province, have fallen for 29 consecutive months. The speculative investors in Shaoguan, a southern city, are no doubt looking at the Wenzhou case with trepidation. In December, that city became the second to join Wenzhou in the month-on-month decline. Three prefecture-level cities, Zhanjiang, Bengbu and Yueyang, are teetering on the edge.”

“Big cities will stabilize, ‘but to most inland cities, the second- or third-tier cities, I don’t think it’s a good year,’ Shao Yu, chief economist at Orient Securities, said last week during a talk with journalists in Shanghai. ‘Because [developers] already provide a huge supply, so the price I don’t think has any chance to go up. They can simply go down.’”

Want China Times. “A real estate agent in Wenzhou told CCTV that the number of housing transactions has dropped 50% to 60% to only five to six deals being closed every month, and the impact this year has been harsher than the sector expected. Signs pointing to fire sales, have been seen at every property agency in the city.”

“One realtor said that during the ‘good old days’ between 2009 and 2011, houses were flipped from one agency to another, and their prices would double in a month in the process. Chen Hong, a senior researcher at Wenzhou University’s real estate institute, told CCTV that heated market speculation has led to low occupancy rates in residential projects. Another agent said that a house, which could be sold for 40,000-50,000 yuan (US$6,595-$8,244) per square meter before, is now worth only 22,000-23,000 yuan (US$3,628-$3,793) per square meter.”

The Epoch Times. “For years, Ren Zhiqiang, one of the largest property developers in China, said he has been attempting to draw attention to the risks in China’s real estate market. He alerted investors to slowing house prices in a real estate award ceremony on Jan. 21 of this year. ‘I’ve raised the topic of ‘risk’ in real estate reports for the first time in over 10 years,’ Ren said. ‘It’s a very dangerous thought that developers still believe house prices will increase like in 2013. That’s my biggest worry.’”

“Housing price growth has been worse in third and fourth tier cities so far this year, with a declining trade volume for the last three months. The slowdown in the real estate market is having a more pronounced impact on the smaller cities than many predicted. ‘Real creative and big companies in China are located in top tier cities, and almost none of them are in China’s third and fourth tier cities. This leads to brain drain and population outflow in those places,’ said Jason Ma, economics commentator at a major real estate consultancy. ‘So small cities can only rely on natural resources such as mining or government projects. But local governments have less and less ability now because of huge local debts.’”

“This exacerbates what observers have called ‘ghost cities’: under-occupied cities, where vast sums of money has been spent on real estate projects that then generate insufficient income to service the enormous debts. ‘It might be too early to reach a conclusion on China’s real estate market collapse,’ Jason Ma said. ‘But if the trade volume keeps trending low like this throughout February, it may be a signal that housing prices are in a dangerous place.’”

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