August 12, 2014

The Idiot-Proof Property Market

A report from Want China Times. “In the first half of the year, China’s property market entered the stage of structural oversupply, with first-tier cities, which had been seen as the most secure market, encountering apparent declines in sold areas, the Beijing-based Economic Information Daily reports. The actual situation reverses expectations, with sales volume in first-tier cities actually leading the overall market, indicating the property prices in the first-tier cities may soon encounter big downward corrections.”

“When property bubbles begin to burst, the high property prices are still beyond the affordability of most buyers. Therefore, the price declines may quickly fall to much lower levels. Moreover, in first-tier cities about 20% to 30% of households already own multiple houses. Most buyers have adopted a wait-and-see attitude amid rising personal credit costs and the anticipation of further declines. Banks have been tightening mortgage approvals to control risks as the market adjusts. It seems certain then that first-tier cities have entered a cycle of major downward corrections.”

From CNBC. ” For the first time in three years lands plots up for auction in Beijing went unsold last week, signaling that developers are nervous about ongoing weakness in the country’s property market. Two of the five lots put up for sale by the Beijing government last week received no bids – for the first time since April 2011, according to Chinese media reports. In another auction on Monday, two of four lots were sold to developers at lower-than-expected prices.”

“Local governments in China rely on land sales for the bulk of their revenue and are unwilling to budge on high prices. According to Ryan Huang, strategist at IG’s Singapore office, the unsold auctions suggest ‘a mismatch between what increasingly cautious developers are willing to pay versus what local governments want.’ ‘We’re likely to see the relatively muted appetite by property developers continue, as investors get increasingly concerned over a property slump and take a wait-and-see attitude,’ added Huang.”

From Bloomberg. “China’s slumping property market is fueling speculation the industry is set for a shakeout as small developers face difficulty raising funds to pay off debt. Home prices fell in 55 of 70 cities in June from May, the National Bureau of Statistics said on July 18, the most since January 2011 when the government changed the way it compiles the data. The inventory of unsold new homes in 20 large cities jumped to an average equivalent of more than 23 months of sales in June, according to Shenzhen World Union Properties Consultancy Inc. The floor space of unsold new apartments nationwide as of June 30 surged 25 percent from a year earlier, government data show.”

“‘The overall credit environment is tight for smaller developers,’ said Fu Bei, an analyst at S&P in Hong Kong. ‘Banks and trust companies have reduced their financial support for such companies given the rising risk. Given the declining credit to small developers and the weaker home sales, there will continue to be defaults of smaller developers this year.’”

The Epoch Times. “Up until 2014 the term bankruptcy was unheard of in China. It just wasn’t allowed. Now, about $1 billion worth of junk bond debt is about to go sour within the next three months, according to a report by China Merchants Securities Co. ‘The current risks exposed in the private-bond market are probably a prelude to a storm,’ Sun Binbin, a Shanghai-based bond analyst at China Merchants told Bloomberg News.”

“Goldman Sachs goes even further and writes in a note, ‘The logical conclusion has to be that a non-negligible share of the corporate sector is not able to repay either principal or interest, which qualifies as Ponzi financing.’”

From Xinhua. “The cooling of China’s property market is likely to encourage authorities to speed up property tax reforms, which many believe will play a key role in putting the sector back on track. The absence of such a system has enabled many Chinese to capitalize on the country’s over-heated property market, making it a major source of public complaints over recent years.”

“Believing that there is not much room for a sharp appreciation amid the current market downturn, Zhao Zhengguo (not his real name) has this year sold two of several apartments he owned in Beijing in order to secure cash. ‘It will not be long before the property tax spreads over the country. The tax itself is not a problem, but it will make housing less reliable as an investment choice,’ said Zhao, who rose from a wage earner to a billionaire thanks to his housing investment.”

“Gone are the days when Chinese property developers could make a killing simply by building more houses. It used to be the case that bad money drove out good, as large developers focusing on providing quality and much-needed houses usually earned less than smaller ones which relied on rising housing prices. ‘The past decade saw the establishment of an idiot-proof property market, one in which almost all market players could earn quick and handsome money by building houses,’ said Chen Aiming, CEO of Sincere Group, a large developer in southwestern China’s Chongqing Municipality.”

The South China Morning Post. “One of the theories of China’s slowing economy is that it will run into a ‘Lehman moment.’ This is when a single financial institution collapses, threatening the entire banking system, ultimately creating a financial crisis. The theory has neat predictive power: find the weak links among Chinese banks, pin down a useful measure of financial liquidity - such as the interbank lending rate - and you have a nice way of keeping tabs on the strength or weakness of China’s economy. The problem is the theory may be wrong.”

“Property loans accounted for 26 per cent of new loans in 2013. Also, property developers are major borrowers in the shadow banking sector. As the property market slows, the government continues to promote mortgage lending. It is quite likely that cash-strapped townships are going to be confronted with real estate projects that are worth much less than they thought. As asset values fall, income from land sales will also decline. Thus, they are likely to curtail spending.”

“In its just released report on China, the International Monetary Fund described the chain well: “Many strands of the web, moreover, run through the real estate sector. Banks and shadow banks are exposed to real estate directly through credit to developers and household mortgages, and indirectly through the use of real estate as collateral for other loans. Local government spending is also linked to the real estate sector, directly through land sales revenue and indirectly through the tax revenue generated by real estate related activity.’”

“‘Given these interconnections, a major shock to any part of the web would reverberate throughout the whole, creating a negative feedback loop that could … amplify the original shock.’ So, let’s stop getting caught up in neat catchphrases about the Lehman moment and focus on the real problem in China - the real estate bubble.”

Bits Bucket for August 12, 2014

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