The Housing Bubble

A report from the Strait Times Indonesia. “After more than a decade of seemingly endless growth, Australia’s property market is on a downward slide that is expected to be steady and protracted. For now, though, the downturn is cushioned by buyers from Asian countries, who continue to see Australia as a safe haven for property investment. Consultant Lim Jee Huat, a Singaporean who owns a house in Perth, said: ‘The strong Australian dollar will help to offset the drop in property prices.’”

“He bought the property as a long-term investment for about A$320,000 (S$410,000) in 2005, when the Australian dollar was almost on a par with the Singapore dollar. The house now would fetch around A$300,000.”

“Singaporean businessman Ronald Sim paid around A$350,000 in 2008 for his house in Melbourne, when the Australian dollar was almost on a par with the US dollar. He reckoned the property is now worth around A$330,000. ‘I am not too worried that prices are falling as I can still get quite decent rent out of it,’ he said.”

The Business Spectator. “The common wisdom that China saved Australia from the worse of the Global Financial Crisis is correct. From 2008-2010, the world witnessed an unprecedented surge in Chinese bank lending and fixed investment. Total bank loans issued jumped from around $740 billion in 2008 to $1.4 trillion in 2009, before falling to $1.1 trillion last year. This means the total outstanding loans in the economy have jumped by nearly 50 per cent over the past two years.”

“There are a number of domestic and external reasons why Chinese central bankers are largely powerless when it comes to significantly slowing lending. In many provinces, up to half of all local government revenues are based on state-owned-enterprises – commonly known as Local Financing Vehicles – making money from the property market. From 2009 onwards, it is estimated that 20-40 per cent of all loans have been used to finance the building of residential property even if few ordinary Chinese citizens can afford to buy them.”

‘Even if Beijing could enforce its will on the 45 million local officials – and it cannot – local fiscal reliance on an ever more precarious property bubble means that local officials will not easily accept slower loan growth and a construction slowdown. Second, stagnating consumption in the United States and the European Union means that Beijing needs to find other ways to maintain and create jobs for its 750 million workers.”

“China’s perpetual fixed-investment stimulus means that it will eventually have a hard landing. We are deluding ourselves if we think we can avoid the ‘Dutch disease’ by relying on the construction of more and more empty residential blocks, shopping malls, ghost cities and unused infrastructure.”

From CNBC. “Elaine Fang, a real-estate broker with Midland Realty on Hong Kong Island, is very happy to see mainland Chinese buyers walk through the door of her branch at The Belcher’s. If she does her job, she’ll sell an apartment. If she does it well, she’ll sell a whole floor of a building. That’s happened twice this year, with one buyer from across the border snapping up five units for a total of HK$72 million (US$9.2 million) at the Kerry Properties development Soho 189.”

“Another Chinese buyer picked up a storey at HarbourOne, a building under construction along the waterfront just west of Central. Three large apartments in that storey cost HK$100 million (US$12.8 million). ‘They bought the whole floor — I don’t know whether it’s for their own use or for rental, because the apartments will be ready at the end of next year,’ Fang says. But she doesn’t think they’ll need much financing. ‘Most Chinese buyers will do full payment,’ in cash.”

“Joe Lo, a broker with Centaline at the Olympic Station branch in Kowloon, recently sold an 817-square-foot apartment to a mainland buyer for HK$8.95 million. She had waited to buy but thinks now is the time to get in. ‘She rented an apartment for more than two years, but she wanted to invest in Hong Kong,’ he says. ‘She thinks the market will still go up in the coming years.’”

“I was interviewing Mr. Zhou, one of China’s largest real estate developers, when he started to share his investing strategies with me. ‘I never buy Chinese stocks It is far safer to buy real estate. There are too many Chinese without adequate housing so demand will always outstrip supply. There are no annual property taxes, so I just buy homes and leave them empty to resell at some point. At the end of the day, if things go wrong, you still have tangible assets if you buy property.’”

The National. “Take a train from Beijing and after a few hours, each city you pass through becomes indistinguishable from the last. Orange cranes stand by to construct the endless rows of tower blocks, some of which are still just dark shells, while others are completed and awaiting residents.”

“Such has been the pace of development, fuelled by a rise in prices, which went up threefold between 2005 and 2009, that many believe the sector is set for a heavy landing, perhaps repeating the difficulties it suffered in late 2008. Then, large cities such as Shanghai and Guangzhou saw sharp falls in property prices, and rates of construction fell steeply too.”

“Fanning fears of another slowdown, there are now cities such as Ordos in the province of Inner Mongolia where vast swathes of properties lie empty, with developers apparently having thrown up apartment blocks with abandon.”

“It is, says Stephen Joske, director of the Economist Intelligence Unit’s China Regional Forecasting Service, ‘an urbanisation that got ahead of itself.’ He adds that vacancy rates in many of the areas of urban China he has studied are above 20 per cent.”

From GFS News. “China’s banking system faces significant risks due to its property bubble which is threatening bank asset quality, according to Fitch Ratings. Fitch sovereign group senior director Richard Fox claimed that a rampant property bubble is more than likely to burst. ‘We’re talking about systemic crises here, affecting most of the major banks,’ Fox remarked.”

From Dow Jones Newswires. “A Fitch analyst said at a seminar the ratings firm was more concerned about the property sector than local government financing vehicles, even as the latter have taken on substantial amounts of debt. ‘We believe that the LGFV issue is much easier to deal with than property for two reasons,’ said Charlene Chu, head of China financial institutions at Fitch. ‘The government has done a lot of work to identify these loans. Property on the other hand is very difficult to deal with because it’s penetrating every aspect of the economy and you can’t isolate the problem and throw money at it in the way you can for the local government issue,’ she said.”

“China’s easy monetary policy in 2009 and 2010 fueled a rise in inflation and a property bubble, and credit risk has risen from an overextension of loans to local governments and property firms. Chu told the seminar Wednesday that compared to banks’ exposure to local government financing vehicles, the property market is ‘more intractable and much more complicated to deal with.’”

“Real estate has been the foundation of China’s supercharged growth over the past two decades, and its health is crucial to the construction, steel and cement sectors. Local municipalities and provinces receive funds from land sales and rely on higher land prices to fund infrastructure projects. Central bank data showed that a quarter of new yuan loans issued last year were related to the property sector, including mortgages. Analysts believe the share was much bigger in 2009, the first year of China’s two-year massive spending campaign to cushion the impact of the global financial crisis.”

The Guardian. “LaSalle Investment Management, which manages £27bn of real estate assets across the world, has this week raised fears that the strong growth in commercial real estate in London may itself be a bubble. ‘The relative lack of caution in the real estate capital markets is a concern. It is remarkable how quickly capital has returned to real estate. The re-emergence of a competitive credit market, so quickly after the bursting of the credit bubble, is also astonishing,’ said Jacques Gordon, Global Strategist at LaSalle Investment Management in the company’s mid-year Investment Strategy Annual Report.”

“A separate report by Partners Group, a Swiss investment house, out this week, shows that prices for trophy properties have surged so much they are now approaching the peak seen just before the property crash levels in 2007. This is partly because so many sovereign funds from places like Canada and cash rich economies like the middle-east, Russia and Asia are piling in because they see London as a safe haven.”

“If we roll back the clock a few years, this is exactly kind of market that the foolish Irish property developer loved – piling into London at its peak in 2006 and 2007.”

The Montreal Gazette. “At Tralee, on a tour of golf courses in southwest Ireland, a caddy named Danny explained that he had a mortgage of €250,000, or $375,000, on his house. He can’t possibly pay it on a caddy’s earnings and tips, and the golf season in Ireland ends in mid-October.”

“He got the mortgage five years ago when he was a foreman in the housing industry, a boom that went bust. Danny’s story is all you need to know about the origins of the Irish financial and economic crisis. Nearly 20 per cent of Ireland’s housing stock is empty, and hundreds of thousands of Irish families are holding mortgages now worth twice as much as their homes.”

“At one time, 20 per cent of the Irish workforce was in the construction industry, building homes and office towers, many of which are now unoccupied. Gleaming new office buildings on the outskirts of Dublin stand empty – ’see-throughs,’ as they are called in the real estate industry, with no curtains, no furniture, no offices and no people.”

“Of 780,000 mortgage-holders, the Irish Independent reported last weekend, 50,000 are three months or more in arrears on their payments. There is much talk of debt forgiveness, or restructuring, for those hardest hit. But as Danny asks: ‘Who decides whose debts are forgiven, and how?’”