July 6, 2015

The Elephant In All Of Our Rooms

The Orange County Register reports from California. “Sometimes it seems to be increasingly China’s world, and we just happen to live in it. Yet, a funny thing has happened on the way to global domination – the Chinese are coming here with their money, and, often, with their families. Rather than seeing China as the land of opportunity, more Chinese have been establishing homes in America, particularly in California, where they account for roughly one-third of foreign homebuyers. I witnessed this recently while house hunting. Stonegate, a new Irvine development we looked at, had price tags well over $1 million, beautiful floor plans and well-designed amenities – and, essentially, no yards. Upward of 80 percent of buyers in the new Arcadia development, according to a report in Bloomberg, are overseas Chinese.”

“U.S. China Real Estate Association President Bill Seto has expressed concerns ‘that the Chinese are pricing the middle class, and even some wealthy Americans, out of certain markets, especially when it comes to housing.’ Dependence on Chinese investors also holds some perils. As occurred when Japan’s firms sold off many of their real estate investments in the 1990s, changes in China’s economy, which is slowing and facing major corrections in its stock and property markets, could depress real estate prices and slow the flood of investment. In a U.S. economy already suffering from slow growth, deindustrialization and an ever mounting tsunami of regulation, the loss of stimulus from China could be a devastating.”

The Epoch Times. “Chinese have poured a lot of hot money into Canada’s real estate market in recent years. This has sharply pushed up prices and forced many locals out of the housing market in Canada’s major cities. Take my colleague Mike, for example. He’s a systems management engineer in my department, with an annual income of about $70,000 to $80,000 Canadian dollars, more than double the average income of his peers. Mike is married with two children. Three years ago he bought a big house. You’d think that he’s a happy man. But recently Mike seemed depressed. I finally let go of my Chinese trait of being reserved and asked him if something was wrong. He glared at me and said: ‘It’s all because of you Chinese!’”

“I was taken aback and asked him to explain. That’s how I found out that Mike has serious financial worries. When Mike bought his house, the market was already extremely high and quite unaffordable. The average home price in Toronto was over four times his and his wife’s combined annual income. So his financial situation has been tight. Then his wife was laid off a year ago. After six months she found another job, but with a big pay cut. Their household income had dropped quite a bit, and after paying all their monthly bills—mortgage, insurance, property taxes, car loans, and other living expenses—they ended up with a shortage of several hundred dollars every month.”

“‘Home prices in Toronto are inflated because of you,’ he went on. ‘We cannot afford them! My parents are retired. They planned to spend their remaining years in their old home. But the value of their house has gone up and property taxes have also increased. They could not afford it anymore, so they had to sell and move far away to a small town in Ontario.’ ‘Our present living standard is all caused by you Chinese,’ Mike added.”

“I was not happy listening to Mike. It never occurred to me that we Chinese look so bad in the eyes of the local people. But I did not say anything as I felt that Mike must be very frustrated to be saying these harsh words. Later, when I thought it over, I came to see Mike’s point. Home price have gone out of control in places where Chinese people have settled in recent years, such as New York, San Francisco, Los Angeles, Vancouver, Toronto, Sydney, Melbourne, etc. Despite the global economic downturn, Chinese people are still buying houses while Westerners are unable to afford a house.”

The Australian. “We go to the weekend with tiny Greece once again at centre stage, but with the ‘elephant in the room’ — indeed, in all of our rooms — China, jostling for the spotlight. Greece matters most to Greeks — there, here and everywhere — and then to Europe more generally. For the other 6.5 billion people on the planet, apart from market gyrations? Not so much. With China it works the other way. The middle kingdom matters big time for all 7 billion-plus of us on the planet; and it matters supersized big time for the 25 million-odd of us down under, including our Greek component.”

“We’ve been in the process of discovering just how much China matters for us as its growth rate has stepped down from 10 per cent plus to the 7 per cent, which is something of a line in the sand for everyone — there, here and everywhere. In essence, a 7 per cent growth rate brings — brought? — to an end the ‘boom’ part of ‘resources boom.’ With a sustained 7 per cent China growth rate, we would keep the resources development that’s occurred, but we’d get no more.”

“This is a very strange time for a property market boom or ‘bubble,’ when we are waiting for a global financial implosion; and if that doesn’t get us, perhaps the big China (grizzly, not Panda) bear will. The reason is that it’s not really a ‘property market’ boom but a ‘love for assets in the time of choleric low interest rates’ story. With tens of trillions of dollars of global investor money, supplanted by trillions of ‘free’ central bank liquidity, there’s a desperate global search for either or both yield and assets.”

“In our case, this demand has been further leveraged by Asian and especially Chinese ‘flight to safety — and perhaps profit’ buying of both new and second-hand property. A Melbourne or Sydney property that’s risen from $2.2 million a year ago to $3m today almost hasn’t risen in cost at all for such overseas buyers — while its appeal is significantly greater now than then. Indeed the very slowing of China’s growth rate will spur greater outflows from the Middle Kingdom.”

“What we don’t seem to understand is that we are embarked on the mother-of-all asset sales. Let’s hope we don’t look back on it as also the mother-of-all fire sales.”

From Bloomberg. “It sounded like a good idea at the time: encourage growth in China’s stock market as a way for companies to raise capital. And if that paid down some of the nation’s record debt load in the process, so much the better. The problem: promoting a market where retail investors dominate daily trading left policy makers vulnerable to swings in sentiment that are tough to control.”

“‘It’s too early to call a crisis, but the butterfly wing has swung and ripple effects are expected,’ said Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd. Zhou said the stock price plunge may spread to cause interbank liquidity strains, and banks may become more cautious in lending to firms with large exposure to equities.”

“‘It’s still unknown how much and how widely bank money is involved in the unofficial margin trading,’ said Chen Xingdong, head of macroeconomic research at BNP Paribas SA in Beijing. ‘It’s an unprecedented situation in China’s stock market history. A stock market bubble was partly inflated by the visible hand, and then the bubble burst, causing panic.’”

News.com.au on China. “The empty streets of new-age cities in China have been attracting international curiosity for years. Any train ride along the eastern side of the country will expose hundreds of these unfilled settlements. A few hours from the mega metropolis of Shanghai, one such city is raising eyebrows. Not just for its empty towers but also for its very familiar style. It’s Tianducheng — a prime example of an urban development that’s failing spectacularly.”

“Nothing could have prepared me for the eeriness that I found inside. But perhaps the most poignant moment of my trip came at midafternoon on my fourth day in the city, when I found myself strolling down what looked to be the famed Champs Élysées. Weaving between manicured hedges and sprawling fountains, the iconic Eiffel Tower soared ahead in the distance. Parisian facades rose high on both sides of the boulevard.”

“Unfortunately, high real estate prices and a change in economic growth have resulted in few visitors — or residents. Original plans had an expected capacity of 10,000 residents, but today the town’s population is around 10 per cent of that. The streets are unoccupied, shop fronts have been boarded up, iron railings are rusted over and that famous fountain is bone dry.”

“The skies remain grey most of the year from the heavy pollution drifting in from factories in the surrounding area. The only time you will see a hive of activity is at the end of the day, when construction workers finish their shifts. The park that surrounds their Eiffel Tower is littered with trash and overgrown with weeds. The odd cow wanders across the fields while security guards sleep in the shadow of the tower. Basketball courts are covered in dirt, with no one around to use them. One corner of the park holds the worker’s quarters.”

“The sanitary and living standards are appalling, but no-one complains for fear of losing their employment opportunities on the adjacent building sites. On their Champs Élysées, the situation is only marginally better. No water flows through the canals and business doors are bolted shut. There’s no money to be made from this fake Parisian city. No flocks of tourists and no romantic movies being filmed beneath the Eiffel Tower. Just more money being spent on new residences that no one can afford or would even want.”

Bits Bucket for July 6, 2015

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