The Housing Bubble

Readers suggested a topic on implications of the China housing bubble. “What are the implications for the U.S. housing market of a collapsing Chinese housing bubble? For instance, will the number of all-cash Chinese investors snapping up U.S. homes at fire sale prices decrease?”

A reply, “Are the Chinese investors coming here with money from cash-out refinancings or from business profits? If the latter, there still could be a slow down in the investors coming over, but there might be some delay on the impact. Or there could be a big surge (get the cash out of China) followed by a slow down. I doubt this is a simple relationship.”

Another said, “If the Chinese investors are anything like the ones I’ve seen in this nabe, prepare for a lot of lousy landlords. As in, they have trouble understanding English when it comes time to maintain or repair anything. But don’t dare be a nanosecond late with your rent.”

From Reuters. “The monumental, neo-Mongolian sculptures, empty plazas and hulking concrete shells of buildings in Ordos district, deep in the steppes of Inner Mongolia, are a potent symbol of how China’s property boom can turn to bust. Off the back of a thriving coal industry, the local government has been building a new city for one million people called Kangbashi. It sits virtually empty and property prices are falling.”

“‘People are worried. Especially if they have bought two or three apartments,’ said Yu Mingjun, a worker sitting in a down jacket at a ramshackle office of a half-completed project in the old town.”

“Prices in Ordos have already fallen below the level that analysts say would cause serious problems if mirrored nationally. Prices have plummeted 20-30 percent in certain property developments in Beijing and Shanghai. ‘The decade of explosive growth in China’s real estate industry has gone. Developers must think about a shift in their strategies now and aim for the long term,’ said Qing, president of Beijing Zhongkun Investment Group, a Chinese developer. ‘China can undertake a home price cut of up to 30 percent. But I’m not sure about what will happen beyond that.’”

The BBC. “‘The current crisis is grimmer and more challenging than the global financial crisis triggered by the Lehman Brothers bankruptcy in 2008,’ China’s Vice Finance Minster Zhu Guangyao told a forum in Beijing on Thursday. ‘At that time, the world economy maintained growth, and world leaders… rolled out a massive fiscal stimulus and monetary measures… so that the crisis was to a large extent contained and economic recovery was achieved in a relatively short time.’”

“The problem is that now things are different. It is far harder for China and other nations to roll out new stimulus measures. The shock this week was the news that China’s massive factory sector, responsible some say for 40% of GDP, is now contracting for the first time since 2008. While China’s manufacturing is having a tough time, so too is another important part of its economy, the housing sector.”

From Bloomberg. “Early in the morning on Nov. 25, Ren Zhiqiang — one of China’s wealthiest, most famous and arguably most detested real estate developers — posted a question to his 5 million followers on Sina Weibo, China’s most popular microblog. He asked: ‘Is there any country in history that has managed to grow its economy stably after a property bust?’”

“Ren Zhiqiang and many Chinese homeowners now find themselves with negative equity. But for Ren, what makes it considerably worse is that this crash is, in large part, a bureaucrat’s bet that the long-term health of the Chinese economy is best served by purposely tanking the real estate market now, rather than waiting for it to tank on its own. He took obvious exception to this on Weibo: ‘I wake up this morning and find the radio, TV and print media all going on and on about how the property market is entering a winter season as real estate prices tumble. I don’t understand — are these macroeconomic adjustments here to help stabilize economic development, or are they here just to make property prices fall?’”

“On Nov. 29, Beijing Youth Daily, the official newspaper of the powerful Communist Youth League, published ‘A Minimum Price Drop of 50% Is Acceptable.’ It read: ‘How much is a reasonable drop in houses prices? We ought to take the acceptance of the common people as the standard, and whether or not they can accept the price directly related to their income. So, housing price-to-income ratio, which is a common index around the world, becomes an important standard for measuring the housing slump. According to the 1:6 housing price-to-income ratio, at least a 50 percent fall in the Chinese housing prices appears to be reasonable.’”

“Qiu Zhenhai, a commentator on Hong Kong-based Phoenix TV, a station with close ties to Beijing, tweeted on Sina Weibo: ‘The housing price problem has torn Chinese society into two pieces. One half is the homeowner group and the other is the non-owning group. The former not only wishes that the housing price will not drop, but also wishes it to rise steadily. The latter not only wishes the housing price will drop, but wishes that it drop sharply … The latter aren’t very influential, but they do have the energy to riot.’”

The Architectural Record. “While the U.S. construction market remains in the doldrums, Toronto’s real-estate sector has been humming along since the late 1990s, with only a brief slowdown in 2008. Today, the research service Emporis is tracking 147 high-rise buildings, among other projects, under construction in Toronto. For a site along a busy road in the exclusive Yorkville district, the local firm Hariri Pontarini Architects is designing a six-story luxury condominium with limestone and glass cladding. Its 10 units (starting at 1,800 square feet) are priced from $2 million to $5 million; half have sold.”

“Over 50 percent of Torontonians are now foreign-born—make the city attractive to young people. Indeed, many of the new towers are catering to single professionals and young families who want urban lifestyles and are willing to live in small spaces. A 500-square-foot condo in the downtown area costs at least $300,000. For projects with rental housing, many of the landlords are recent immigrants, from China or South Asia, who see real estate as a solid, long-term investment.”

The Arizona Republic. “Thirty years ago, Arizona’s snowbirds were a largely monolithic flock. They stowed months of supplies in their RVs and fled the cold Midwestern winters to soak up the sun at mobile-home parks in the East Valley. Snowbirds, also known as seasonal residents, have since evolved into a richly diverse group. Canadians, motivated by their suddenly strong dollar, are now descending in droves, many abandoning Florida’s sunny beaches for the desert landscapes and lower property taxes of the Southwest.”

“Baby Boomers in their 50s or even late 40s — at least those who can afford to buy second homes or condos — are a newer breed of winter visitor. The trend toward home ownership accelerated over the past decade as Baby Boomers, born between 1946 and 1964, started to snatch up retirement and investment homes in the down market. Judy Lutes, president of the Arizona Winter Visitors Association, a group that provides services to snowbirds, said the Boomers have a distinct difference in taste from their parents’ generation, preferring resort-style living over the close-knit RV parks.”

“‘Shuffleboard and stuff–that doesn’t impress them,’ Lutes said of the Boomers. ‘They’re into homes and condos.’”

“Michael MacKenzie, executive director of the Toronto-based Canadian Snowbird Association, counted 556,000 of his countrymen alone who migrated to Arizona last year. He expects even more this year. The Canadian dollar, which in 2002 was worth 62cents to the American dollar, now is worth closer to 95cents. ‘That has a huge psychological impact on Canadians,’ MacKenzie said. ‘A lot of people who for years were renting are now buying. People who owned are now upgrading. Most Canadian snowbirds are driven by price and real-estate values are good.’”

From Moneyville. “On Dec. 6 officials of the Canadian Snowbird Association land in Washington to lobby for passage of the proposed ‘Canadian retiree visa.’ It would allow Canadians over the age of 50 to stay in the States eight months, instead of the current six, if they own a home or plan to rent there.”

“It’s part of a broader bipartisan proposal, the VISIT-USA Act, that is working its way with uncharacteristic speed through the U.S. Senate and House of Representatives. It’s aimed at kickstarting the decimated housing market by offering foreigners a three-year residential visa if they invest at least $500,000 in real estate. A least half that has to be on a home where they plan to live at least six months of the year.”

“At the same time, the U.S. is aggressively wooing wealthy Canadians willing to invest at least $500,000 for a minimum of four years in economically depressed regions of the U.S., says Toronto-based immigration lawyer Andy Semotiuk. Canadians are the biggest foreign purchasers of U.S. residential real estate and own an estimated $50 billion worth in Florida alone.”

“Shant Epremian left his six-figure Toronto job three years ago to start buying Florida real estate. He turned that lucrative hobby into a thriving business, Pink Realty of South Florida, and now has a staff of 20 who help Canadians look for properties. ‘Americans may not be welcoming of some other nations in the world, but they absolutely love Canadians,’ says Epremian. ‘We joke at seminars (for Canadian house hunters) that the president and the governor of Florida would like to thank you for your contribution to the bottom line of the United States.’”