February 25, 2014

If Problems Arise, They Will Be Hard To Deal With

A report from the Denver Post. “As the listing agent for a new development near the University of Denver, Liz Richards has sold six row homes since December — and who was buying them came as a surprise. ‘Half of them are Chinese buyers with cash — there seems to be a lot of cash,’ said Richards, a broker with Kentwood City Properties in Denver. ‘This is a brand-new trend.’”

“Chinese buyers paid a median price of $425,000 for their U.S. home purchases in 2012, according to the NAR, more than double the $183,000 median price shelled out by Canadian buyers. Golden Realtor Jim Smith, after hearing the pitch at the NAR convention in San Francisco in November, signed up and hired a student from Colorado School of Mines to translate his listings into Mandarin. ‘There is a factor here of them wanting to export their dollars,’ Smith said. ‘They want to move their wealth out of the country before the Communists seize it if there is a change in attitude.’”

The Wall Street Journal on China. “China’s red-hot property market is showing its strongest signs yet of a cool-down, as price growth eases, credit for many developers dries up, and some start to cut prices at new housing projects. In some markets, developers are also worried about an oversupply of homes. Developer DoThink Group last week said it cut prices by 12.2% at its North Sea Park project in the eastern Chinese city of Hangzhou to 15,800 yuan ($2,592) per square meter from 18,000 yuan per square meter.”

“Analysts said the price cuts in Hangzhou and in the nearby city of Changzhou are an indication that those places have an oversupply of housing, which could spread to larger cities. In Changzhou, the developers of a 21-tower project announced discounts last week. Prices were reduced to an average of 7,000 yuan per square meter, with some units selling for 5,380 yuan per square meter, down from an 11,000-yuan price tag in December, according to property broker SouFun Holdings.”

“‘The risk in the property sector is currently underappreciated, and the price cuts in Changzhou and Hangzhou are worrying signals worth investor attention,’ said Nomura economist Zhiwei Zhang in written comments. ‘A sharp slowdown in property investment is possible and would increase systemic risks.’”

Global Time on China. “Share prices of property developers plunged on Monday. A private survey of 100 cities by Soufun, China’s largest online property consulting company, indicates five more cities witnessed falling prices compared with December. The sliding share performance was also in response to recent reports of falling prices in the southern Chinese cities of Hangzhou and Changzhou, signaling a downturn in the property market.”

“‘Minimum price of apartments for sale is now 11,800 yuan ($1,935) per square meter, down 6,000 yuan from before,’ Zhang Yu, a saleswoman at a newly built residential community named Champs Elysee located in north Hangzhou, Zhejiang Province, told the Global Times. ‘Our rivals have also cut their prices,’ Zhang said.”

“StarRiver, a high-end property in Changzhou, East China’s Jiangsu Province, went further by offering almost a 60 percent discount to as low as 5,380 yuan per square meter during the past three days, said a saleswoman who declined to be named.”

Xinhua on China. “The average monthly increase for new homes slowed slightly to 0.49 percent last month from 0.51 percent in December, with the average in the four first-tier cities — Beijing, Shanghai, Guangzhou and Shenzhen — slowing 0.1 percentage point from December, the National Bureau of Statistics said in a statement. Prices of existing homes also moderated, declining in 13 cities, as opposed to only five in December.”

“Senior NBS statistician Liu Jianwei partly blamed tighter credit. Since the beginning of year, commercial banks have become wary of lending to the property sector after a liquidity crunch last year. Industrial Bank suspended loans to some property projects until the end of March, as well as steel, cement, construction and other sectors related to property. Industrial Bank’s unilateral action is a reminder of risk in the property sector this year.”

“‘Due to tight liquidity, if problems arise, they will be hard to deal with,’ the Shanghai Securities News cited a minute from the bank as saying Monday.”

The Hong Kong Standard. “Rumors that the Industrial Bank will curb lending to the property sector drew heavy selling in real estate and banking stocks in Shanghai and Hong Kong. Although Industrial Bank and other mainland lenders denied the rumors, skeptical investors rushed to sell. Things do not look favorable this year. As the US Federal Reserve will certainly continue to taper its bond-buying, funds are leaving emerging markets.”

“Local developers are queuing up to clear inventory, while land auction prices in Tin Shui Wai hit a 12-year low. Hangzhou was the first to lower the price of new flats, which saw those who bought at higher prices damage the sales office and showroom.”

Want China Times. “Hong Kong’s property market bubble may burst as local tycoon Li Ka-shing’s Cheung Kong Limited and the special administrative region’s largest commercial real estate agency Sun Hung Kai Properties have been underselling their inventory and price decline is up to 45%. Lee Chun, a manager at Click Property Agency Limited, a local real estate consultancy firm, said that transaction volume, which was earlier pegged at about 300 a month, had now dropped to 10-20 a month.”

“Louis Chan, Centaline Property Agency’s head of residential sales also stated that the secondary market had declined by 75% to 2,000 from 8,000 a month. The falling house prices and plummeting transaction volume have led to property agencies facing bankruptcy and have boosted the unemployment rate in the sector.”

From Al Bawaba. “I remember visiting Hong Kong in the depths of the property bust in 2008, when one-fifth of all homeowners were underwater on their mortgages and, more recently, when there is a vibrant secondary market for garage space in office towers in Central! Hong Kong property prices have doubled since their post-Lehman lows. The spectacular rise in Hong Kong property was due to the Federal Reserve’s epic monetary printing spree since the Hong Kong dollar is pegged to the US dollar, the legacy of a past Deng-Thatcher era crash in the 1980s.”

“Property bubbles distort the competitiveness of even a post industrial services economy. Yet property is the most dangerous, illiquid asset class of them all, a lesson the Gulf learned the hard way in 2008 (and many times earlier, but professional amnesia is an occupational necessity for bankers, property developed and home flippers!). It is entirely possible for property prices to plummet by 50 per cent to 70 per cent when a property bubble explodes due to a global macro shock. Sadly, Hong Kong now faces such a macro shock as China’s credit/shadow banking system deflates and the Fed taper triggers a protracted rise in global liquidity.”

“Financial crises triggered by a property crash can poison a nation’s banking system, corporates and homeowners for at least five to seven years. Five years after the Wall Street subprime crisis, the US economy can deliver barely two per cent GDP growth despite the $3 trillion money printing spree of the Bernanke Fed. Japan was devastated for two ‘lost decades’ after its property bubble peaked and crashed in 1990, when the Imperial palace in Tokyo was worth more than all the land in California.”

“The 1997 currency meltdown in South-east Asia led to property crashes, bank runs, IMF lifelines and even regime changes from Jakarta to Bangkok, Seoul to Hong Kong. In a world of hyper-kinetic, leveraged, cross-border capital flows when panic spreads at the speed of light across the electronic arteries of the global financial markets, a property collapse in Hong Kong will create havoc, systemic risk and contagion across Asia. Nor will a financial and property market havoc be limited to Asia. As an investor, I cannot forget the malign ghosts of 2008 when the angels of darkness spread misery across the world. It can so easily happen again.”

Bits Bucket for February 25, 2014

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