April 8, 2014

The ­Beginning Of Price Capitulation

A report from the New York Observer. “In 2011, in Nassau County five homes were sold for more than $10 million. Four were sold to buyers from China. Of those, Shawn Elliot sold three. Mr. Elliott estimates that today more than 50 percent of houses traded on the Gold Coast that cost $5 million or more go to Chinese buyers. To service the demand, his firm now maintains dedicated phone lines manned by Mandarin-speaking representatives—a practice not uncommon among New York City agencies.”

“Why, then, are so many newly minted millionaires eager to flee the land that lined their pockets at such depth and speed? ‘Simply parking money in an account is not very attractive,’ said Kenneth Pomeranz, a professor of Chinese history at the University of Chicago. ‘And there is a feeling that the domestic real estate market is overheated and that there will be a correction.’”

“High-profile prosecutions emphasized invigorated anti-corruption efforts. Many lesser offenders—and even those who haven’t done anything wrong—also have cause for concern. ‘Lots and lots of people have gotten rich that have ties to the state bureaucracy in one way or another,’ Mr. Pomeranz told me. Some fear the loss of ill-gotten gains, while others may simply be nervous about the questionable dealings of business partners. ‘Or they may be in a gray area. Rules in some cases were vague. Or rules were sufficiently unrealistic that everyone was violating them.’”

Sourceable on California. “According to DataQuick, areas where prices have raced past their pre-GFC peak include Walnut, Temple City, San Marino, as well as swathes of San Gabriel and East San Gabriel – all renowned for their popularity with cash-flush buyers from the Chinese community. In Arcadia’s 91007 ZIP code, median home sale prices climbed over the $1.32 million threshold last quarter, putting them 30.5 per cent above the area’s peak in 2007.”

“The geographic scope of investment enthusiasm is rapidly expanding to encompass San Marino, Orange County, and even Las Vegas in the state of Nevada next door. The wave of Chinese buying in California is unlikely to abate anytime soon. The Shanghai-based Hurun Report has found that over 60 per cent of China’s new affluent class have already left or plan to leave the country, with the United States figuring as their top relocation choice.”

The Monterey Herald in California. “Your new neighbor is more likely to come from Shanghai than the Monterey Peninsula, according to real estate guru Alain Pinel. He told a story about one Chinese man buying up three homes in Northern California for more than $20 million each in the past six months. ‘Let’s face it. Monterey is not bought by people who live in Monterey,’ he said. ‘Well, maybe some, 5 to 10 percent, but most people come from another place.’”

The Daily Telegraph on Hong Kong. “The restaurants are fully booked, the shops are packed, the financial markets are booming. For Hong Kong things have, on the face of it, never been so good. The Chinese influx, while profitable, has not been to the taste of all the territory’s citizens, who blame ‘the locusts’ for pushing up home prices and forcing them out of central districts. At the same time, Hong Kong has continued to hold the dubious distinction of topping The Economist’s ‘crony-capitalism’ index, with billionaires estimated to have squirrelled away fortunes equivalent to nearly 60pc of GDP, more than treble the level in second-placed Russia.”

“Over the past five years the largest and most rapid expansion in credit in history that has transformed the People’s Republic of China into the world’s second largest economy on the back of a construction and manufacturing boom without precedent. ‘This is a PRC [People’s Republic of China] town,’ says one senior Hong Kong-based banker. ‘A decade ago, if you heard someone speaking Mandarin, you assumed they had accidentally walked over the border. Today, you can’t get a good job unless you speak it.’”

“Asianomics, a Hong Kong-based research firm, thinks the current upcycle is masking the tell-tale signs of a sharp and possibly unprecedented correction. ‘A nasty downturn in China and a sudden sharp correction in the Hong Kong property market would severely buffet the territory’s economy. China’s problems have become insurmountable and the likelihood that 2014 will prove the year of reckoning is growing,’ says Sharmila Whelan, an analyst at Asianomics.”

NTD TV on China. “This year, Renminbi has dropped so badly that domestic housing, export, and production index have declined. Consequently, the dollars go out and local debts go up. The phenomenon is believed to be breaking the myth of the economic growth in China. Financial expert Rex Zhou believes that economic failure in China, is most likely due to mass printing of RMB during the global financial crisis in 2008. Rex Zhou: ‘The supposed layoffs and factory closures were saved by the mass printing of RMB, lasting for a good couple of years. But now the problems are surfacing. I believe it is more of an issue caused by the monetary policy during the 2008 financial crisis, not necessarily due to the withdrawal of the Fed’s reserve.’”

“Mr. Cheng, anonymous Chinese economist: ‘History does not develop according to the will of an individual or a group. The biggest problems in China’s financial system, are that it is not fair and it is not open. When the development is getting more narrow and restricted by discrimination and suppression, it is only wise to escape.’”

The Australian Financial Review on China. “Security guards provide the first hint of trouble. An even dozen of them line the stairs leading to a sales office on the fringes of this coastal city in eastern China. It’s a tunnel of camouflage, which prospective property buyers must pass through before entering the main building. And that’s just the outside security detail. The muscle is not in place to control would-be buyers. It’s been brought in by the developer, New Century Real Estate, to intimidate protesters who have spent the last three weeks picketing the company.”

“The messy property dispute shows that, contrary to popular belief, ­Chinese home buyers are indeed carrying a significant degree of leverage and that in many cases two generations of wealth is required to buy an apartment, even in an outlying city. It’s about the nascent signs of an upset that could derail China’s credit markets and send shock waves through the global economy.”

“In the space of just two years, Guan Enwei’s decision to buy an off-the-plan apartment from New Century has wiped out the life savings of his family. Worse still, if Guan sold tomorrow he would owe the bank money, even though his apartment won’t be completed for 18 months. Guan and the 700 other buyers in the ‘Noble Garden’development are in this situation because New Century began slashing prices on March 21, in a bid to clear excess stock. Overnight it cut the price of 300 unsold apartments in their complex by 30 per cent.”

“‘The apartment across the hall from mine is now selling for 600,000 yuan ($105,000) less than I paid,’ says Guan. ‘The developer needs quick money. We think the company is in trouble. All the savings my father accumulated are now are gone,’ Guan says. And he can’t just walk away either. In another quirk of the Chinese system, buyers like Guan pay the full amount on day one, when they agree to buy a property off the plan.”

“Chen Lianfeng, a 46-year-old taxi driver, is among the most highly geared. She used all her savings to fund half the deposit, with the remaining 130,000 yuan borrowed from friends and family. That means she really only has a 10 per cent stake in the apartment, which is now worth significantly less than she has borrowed. ‘This price-drop has wiped out 10 years of savings for me,’ she says.”

“In the development next door the situation is even worse. New Century completed 144 luxury villas in October last year, but one owner said just 30 per cent had been sold. ‘They are offering a 35 per cent discount but there are still no buyers,’ said Mr Tao, who would only provide his surname. The steel trader said he paid 8 million yuan for his five-level, 600-square-metre villa and will spend another 4 million yuan fitting out the shell. That’s a 12 million yuan property, which might be worth half this amount if it were put on the market tomorrow. These discounts, which have only ­surfaced this year, look to be the ­beginning of price capitulation in ­provincial cities across China.”

“‘The oversupply in lower-tier cities is very obvious,’ says Andy Chang, an associate director at Fitch Ratings in Hong Kong. ‘I wouldn’t be surprised to see more and more local developers collapse.’”

Bits Bucket for April 8, 2014

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