July 22, 2014

Investors Thought There Was No Risk In Real Estate

A report from Want China Times. “May has always been a prelude to hot property sales in China’s real estate market for the second quarter, but this year its sales have been unusually stagnant. The various sales promotions and sales tactics of developers have failed to stir up excitement and the number of cities seeing property price fall has instead increased sharply, triggering anxiety over whether May is instead heralding a property bubble or the omen of a price collapse, reports our Chinese-language sister newspaper China Times.”

“China’s property market has failed to upgrade the production efficiency of its labor force and is now tethered to many speculative financial products. Oversupply is evident as domestic property developers are halting the construction of new projects. The current supply will take four and a half years to be fully digested.”

The Beijing Review. “The new round of price declines in two years have crystallized worries of a grisly end to the housing boom, but analysts say fears of an American-style sub-mortgage crisis or Japanese-style collapse are overblown. Lu Ting, an economist at Bank of America-Merrill Lynch, ruled out the possibility of a large-scale crash in China’s housing market. Instead, he said the biggest problem in the property sector is a misallocation of resources.”

“‘With only about one third of the 1.3-billion Chinese population living in urban centers, too many homes that will never be filled have been built in small cities. This will likely see a sharp spike in bankruptcies among small developers,’ Lu said. ‘But it will not cause a big crash.’”

From China Daily. “Mao Daqing, Executive VP of real estate developer China Vanke Co Ltd discusses the ‘chilly winter’ sweeping over China’s real estate market and its future on Beijing TV’s talk show. Yang Lan: ‘In May We saw housing prices decline in some cities such as Shanghai and Shenzhen. How do you interpret this?’ Mao Daqing: ‘I would describe it as an indigestive condition. In other big cities that had hot real estate markets, such as Beijing, investors thought that there was no risk in real estate investments. No mater how high the prices were, a ‘rigid demand’ will always be there.’”

“‘But some people still claim it is ‘rigid demand’ even when prices reach 80,000 yuan ($12,890) per square meter. What is this ‘rigid demand’? This demand doesn’t represent those in low middle income; it means real estate in big cities can be easily acquired at any price.’”

From MarketWatch. “You can take your pick of evidence that China’s growth has relied on overindulging on unhealthy levels of debt. But one new statistic that caught my eye — and puts China’s size and debt in perspective — comes in author Joe Zhang’s new book on China’s state capitalism. Zhang calculates that despite having an economy about half the size of the U.S. at current exchange rates, money supply (on a broad measure) is already about 61% bigger. And there is little sign of belt-tightening, with China’s credit balance still compounding at an annual rate of 13%-14%.”

“This credit path might seem self-destructive, but it also comes with a salutary side effect: an enormous property boom. This did not just inflate GDP numbers, but also brought feel-good asset wealth through rocketing land values.”

From NTD TV. “The Chinese real estate bubble is in an extremely perilous situation. Therefore, the Chinese Communist Party (CCP) has implemented a series of real estate control policies, from the Central Government’s micro-stimulation to the local governments’ cancelling the purchase ban order, and the zero down payment measures. There are many ever-changing bailout patterns.”

“Mainland financial commentator Niu Dao: ‘The current situation is that the governments now do everything to maintain the (real estate) bubble does not break, but we all know that the main problem of China’s real estate is the funds rather than other problems. It is about why the collapse of the CCP now takes place? It is impossible for them to solve all conflicts. They are only seeking to protect their own interests to move forward?’”

The New York Times. “Ou Chengbi, a butcher at a sweltering open-air market on the outskirts of Guangzhou in south-eastern China, can scarcely see signs of recovery in her country’s economy. She described how as recently as last winter she could still chop up an entire cow each day and sell it all. ‘Now I can only sell half a cow a day.’”

“Millions of Chinese merchants like Ou seem to be struggling, even as data suggests growth is stabilising. Independent surveys of businesses across China show that in sector after sector, sales and confidence are still deteriorating. ‘All of them are pointing in the opposite direction from this supposed GDP number,’ said Leland Miller, the president of China Beige Book International.”

The Sydney Morning Herald. “The role of Australian banks in helping to fund foreign investment in real estate is coming under scrutiny, as politicians investigate overseas buyers’ activity in the housing market. The trend highlights the global pressure on banks to know more about their customers’ financial dealings, amid allegations wealthy Chinese citizens are secretly transferring money into overseas property markets, including Australia’s.”

“The questions come amid allegations wealthy Chinese residents are using back-channels to move money out of the country, including into Australian property. Chinese media have cited estimates 20 billion yuan ($3.4 billion) has been moved out of China illegally since 2011 via banks. Macquarie analysts referred to this figure in a report last week, alongside estimates Australian lending to non-residents had surged 27 per cent in the year to March.”

“Figures provided to the inquiry by Treasury show approvals of overseas purchases were $24.8 billion in the first nine months of 2013-14, a jump of 93 per cent on the previous year. Australian Bankers’ Association chief Steven Munchenberg said in a submission that when banks were lending to developers, they did not have direct contact with the foreign buyers and could therefore not investigate their funds.”

“‘Basically, a bank will seek to ensure that the pre-sales contracts represent genuine sales,’ he said. ‘The source of funding for foreign purchasers, however, is generally not investigated.’”

“China’s brewing housing bubble and a slowing economy have led to a growing number of Chinese buying real estate abroad, according to China News Service’s real estate web portal. During the 12-month period ending in March, Chinese buyers spent a combined US$22 billion on housing in the United States, up by 72%, compared with the same period a year ago, and taking up 24% of the total housing purchases made by foreigners in the United States, according to the US-based National Association of Realtors.”

“Lu Heren, president of Meritros Investment Group, said the return rate for investing in the housing market in the United States could touch 8% after fees such as property tax are deducted. The relatively higher price of rent will also allow housing owners to recover the cost in six to seven years, according to the report. In comparison, it may take a homeowner a century to recover from buying a residential property in Beijing, Lu added.”

“Not everyone can profit from their investment abroad, Lu said. Some Chinese buyers bought housing in Detroit after the US city went bankrupt. But poor public security made it difficult to lease the houses. Yan Yuejin, a researcher at the Shanghai Yiju Real Estate Research Institute, also said that some real estate agencies hide the possible dangers involved and exaggerate the high returns on such investments in order to boost their sales performance.”

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