Whoever Buys Will Lose
Some housing bubble news from around the world. Globe and Mail in Canada. “Calgary’s tight housing inventory is starting to ease as more properties hit the market. Migration levels, while still strong, appear to be easing, said Ann-Marie Lurie, chief economist at the Calgary Real Estate Board. ‘We’re starting to see that listings are improving, so we’re moving out of this seller’s territory, which is really what’s been causing a lot of those high price gains,’ she said. For now, Ms. Lurie said she’s not hearing any concerns over a potential glut. ‘But it depends on how many are constructed,’ she said.”
“Calgary has so far escaped dire warnings that have characterized condo markets in other Canadian cities, namely Toronto. But developments are picking up: construction on Avenue, a two-tower 319-suite project in the city’s west end, is under way. Meanwhile, two massive residential towers are planned on the downtown’s western edge.”
The Helsinki Times in Finland. “Helsingin Sanomat on Sunday attended nearly 40 property viewings in Helsinki, Espoo and Vantaa. The viewings suggest that the uncertain economic climate continues to affect the real estate market, although some real estate agents blamed Sunday’s low turnout on the sunny weather. ‘I think the general market and economic conditions have had an effect. People postpone buying a house and think carefully about their decisions,’ said Matti Lehtelä, a real estate agent at Huoneistokeskus while hosting a viewing of a relatively new flat in Lauttasaari.”
“No one turned up for the viewing, despite the fact that the asking price for the five-room flat has already been slashed by 100,000 to 593,000 euros.”
Bloomberg on the UK. “More Britons are pulling the plug on home purchases amid signs that the market’s 16-month rally is coming to an end after banks tightened mortgage standards. ‘We saw a sharp increase in the number of buyers who made a generous offer in order to secure a property, then changed their minds and pulled out amid fears of an imminent property market collapse’ in August, said Donna Houguez, a market analyst for residential property investor and data provider Quick Move Now.”
“Buyers ‘aren’t being as forthright about their earnings,’ with late rejections from lenders proportionally higher among more affluent buyers, said Clive Rutland, director at Southampton-based Rutland Chartered Surveyors. ‘Previously, there were assumptions about people that are not now being made. The banks are cross checking people’s outgoings from different sources and now it’s all coming out.’”
From Businessweek. “Brazil’s residential real-estate bubble may deflate slowly, not pop, as speculators abandon the market. Speculators began to turn away from real estate to put their money into fixed income once policy makers began pushing up the Selic, as Brazil’s benchmark interest rate is known, according to Marcel Kussaba, the head of equity research at Quantitas Asset Management. ‘The stake of speculators in the acquisition of homes in past years was underestimated,’ he said. ‘But now that the Selic is high, those investors prefer options with better returns than real estate.’”
The Herald Sun on Australia. “Speaking at a business lunch in Melbourne, Australia and New Zealand Banking Group chairman David Gonski said it was difficult to predict when housing bubbles would emerge. But inevitably, there would be ‘corrections’ in the market, he said. Mr Gonski’s comments come amid fears a bubble is building as demand in Melbourne and Sydney surges. ‘Over time — there comes a time — there will be a correction,’ Mr Gonski said. ‘I don’t know whether it is tomorrow, at five o’clock this afternoon or in three months. Anyone who thinks that prices will always go up is a fool.’”
The Australian Financial Review. “A proposal to hit Chinese property buyers with extra stamp duties or fees is under active consideration by a parliamentary committee charged with finding a solution to the nation’s housing affordability crisis. With the busiest season for real estate sales about to start, community concern is growing that cashed-up mainland Chinese buyers are pricing Australians out of their own market.”
“The hearing heard from real estate agents that many Chinese buyers regarded the potential maximum $85,000 penalty for illegally buying an existing home as a ‘cost of doing business’ in Australia. Demand from Chinese buyers is expected to stay strong in coming years – particularly in the upper reaches of the market – as they move to shelter capital from the Chinese government and provide housing for their children’s education, according to industry experts.”
NTD TV on China. “Local governments in China have lifted restrictions on house purchasing. Hangzhou government even told the local People’s Bank to lower mortgage deposits for second house purchases. Duan Shaoyi, MBA instructor at Beijing Normal University, ‘the new policy may ease the issue a little, but can’t change the trend of the price drop. People all know that the real estate is going to collapse. The market prices are based on supply and demand. When supply is more than demand, nothing can stop the price dropping.’”
“Experts believe nationwide price drop will come soon. 20 to 30% slashed prices will appear. In fact, Beijing already had properties with a 20% price drop in the middle of August. On August 28, state-run Xinhua published a blog article ‘A Director of Housing Management Department Said Houses Are Horribly Too Abundant!’ In the article, the director gave 3 reasons for house prices dropping. Too many house supplies; sales slump; and many developers quietly lowering their prices. The director exposed that the biggest price drop has reached 50%.”
“Chinese economic commentator, Niu Dao, says house prices should have reduced down long ago. The Chinese Communist Party tried everything to save the market in the past years when the prices dropped. Such as using banks to release more money. Niu Dao, ‘but such money releasing doesn’t work now. Once people get out of trouble, they’ll escape to the US. Those who buy houses last will suffer devastating blow. Whoever buys will lose. The bubble is too big, and can’t be supported by a limited purchasing power. In the past, you could sell a house soon after you bought it, but now it’s impossible to sell it. No one would take it.’”
“Whoever buys will lose”
This is starting to get interesting now in China. I wonder how big an impact the Chinese housing meltdown will have on the U.S. market. We have a Chinese national who purchase 5 houses in our area (Sacramento foothills) and a total of 26 in Northern California. They have been mostly sitting vacant, some for over 4 years! He is waiting for appreciation.
In the meantime, he has passed up hundreds of thousands of dollars in rental income. It is just goofy and I don’t understand the reasoning. In China, I believe there is no property tax, so holding costs are minimal. It is a different story in the U.S. and he is going to have a hard time seeing a decent return without rental income.
“I wonder how big…?”
You also ought to wonder where those impacts will land. Sac is a likely target.
I agree Sacramento will see another housing downturn. We get those from time to time. 1990. 2006. Currently, there is good demand for housing here and the ability to build new housing takes time. Everyone stopped building houses and processing land development from 2008-2012. The builders and developers are starting up again.
The real problem for Sacramento is not the Chinese investors though. The real problem is the abundance of “developable land” and the huge amount of money to be made in turning that land into residential subdivisions. It will be a while, but it will come and likely become overbuilt (or “oversold”).
In the meantime, the real estate I purchased in 2008-2010 continues to cash flow nicely and the principal reductions (11%) are substantial 5-years into the plan. I suppose the rental market could crater with a severe recession, but right now, all the millennial children are renting.
The Echo Bubble collapse is likely to come sooner than a normal (fundamentals-driven) cyclical downturn.
You seem to have confused the supply side and the demand side of the market. The supply side (”developable land” etc.) is a given for developed CA markets, including Sac, SF, LA, SD and SLO. I.e. it doesn’t change very quickly over time.
By contrast, you ought to worry a bit if a large surge in demand was driven by an extraordinary influx of Chinese and other foreign investors, as this sort of anomalous surge in investor demand seems unlikely to persist.
If you want to figure out what happens next, draw yourself a supply-and-demand graph with a nearly-vertical supply line and a downsloping demand curve. Then shift the demand curve to the left and see what happens to prices and quantity (volume of sales). In short, they both go down.
‘“From March 2013 to March 2014, more than $22 billion in Chinese money flushed into California’s real estate market,” said Xia Xiang, economic and commercial counselor of the Chinese Consulate General office in San Francisco.’
What flushes in can flush back out again.
Yes, but most of that investment is likely commercial property and apartments. Even if it was all houses, at $300,000/house that is only 73,000 houses. We probably have 8,000,000 houses in CA, so that is less than 1% of the market. I agree with you it is important, but not a market buster on its own.
Of course HA will tell you 4,000,000 houses in CA are foreclosed and vacant. Ha, ha, ha,…………….
“8,000,000 houses in CA, so that is less than 1% of the market.”
‘The market’ is limited to the portion of homes that are for sale, which excludes the vast majority of the 8 million you mention.
CA “needs” 150,000 new dwelling units each year just to keep up with population growth.
Your point is well made though, as you are correct in observing the supply/demand curve is determined by active for sale inventory, not total inventory.
With 4.4 million excess empty and defaulted houses in CA, this shouldn’t be an issue.
“Whoever buys will lose.”
That may be the most brilliant Housing Bubble observation ever!
he who dies with the most houses wins!
You can only die in one house.
Of course, it’s really the public taxpaying public that looses the most since mortgages are still based on OPM. Until that dynamic changes we’ll always be on the hook. They need to make it impossible to run from your principle balance even though the bank takes the house back. Much like Gov’t student loans. I realize the difference between securitized debt vs. unsecuritized. But isn’t that the reality when you only put down 3%???
‘Vanke chairman Wang Shi recently voiced concerns about the possible collapse of the largest real estate developer in China in a declining housing market. Wang said at an entrepreneurs’ summit that he fears the Shenzhen-based Vanke might become the next developer to crumble.’
‘His pessimistic outlook reflects the view that the downturn might spread to the entire nation.’
‘The structural imbalance in supply and demand in the property market has deeply affected housing prices in second- and third-tier cities and threatens to do the same in the first-tier cities of Beijing, Shanghai, Guangzhou and Shenzhen.’
‘Ghost cities in China have until now been seen around second- and third-tier cities. However, the rows of new tall buildings at the Yujiapu Financial District, 150 kilometers from Beijing and 40 km outside Tianjin, remain unoccupied.’
‘Contrary to common perception, Singapore is not short of space. Across the spectrum from residential to commercial and industrial property, the volume of vacant space is turning out to be a blessing for tenants, who now have much better bargaining power than before.’
‘The latest official data show a total of 21,268 private residential units were unoccupied in the second quarter of this year, translating into a vacancy rate of 7.1 per cent.’
‘The most alarming numbers are in the industrial segment. Broken down into business park, factory and warehouse space, the combined vacant lettable area in the industrial segment is a staggering 44 million sqf. On top of that, there is another 81 million sqf of gross floor area (GFA) that will be completed in the next few years.’
‘Of particular concern is the proliferation of small strata-titled industrial units since four years ago. Investors constrained by the prices of new residential launches and restrictive cooling measures turned to small-sized industrial units due to the low quantum of investment and the potentially lucrative 5 per cent rental returns. The prices of 60-year leasehold small-sized industrial units crossed S$800 per sqf and freehold ones went above S$1,300 psf.’
‘The thousands of small industrial units that were completed in the past two years have contributed to the increase in vacancy rates. Several projects that sold like hot cakes during their launches in 2010 to 2012 were completed recently, but many of the investors now face difficulty finding tenants. A few lucky ones could have achieved rental yields of about 4 to 5 per cent on their purchase prices, but many investors have held on to their empty units for more than a year, since the projects were completed.’
‘Those who say that Singapore is landlocked and therefore property prices can only go up probably assume that: (1) Economic and population growth are givens; (2) space-users do not optimise and rationalise while demand for space increases, i.e. demand for space grows in direct proportion to economic and population growth; and (3) we are much limited by the height and depth that we can build our buildings.’
‘The above assumptions do not always hold true. Singapore has ample space to grow for many more decades.’
“The prices of 60-year leasehold small-sized industrial units crossed S$800 per sqf and freehold ones went above S$1,300 psf.’”
The Singapore Dollar is worth U$.80. I find it hard to believe small industrial space is going for S$1,300 psf. That would be $1,625 psf in U.S. dollars. Our typical “incubator” industrial space goes for $80-100 psf.
They must mean psm or Per Square Meter. One square meter is 10.76 square feet, so converting to U.S. dollar terms, Singapore industrial is $1,625/10.76 = $151 psf. That is about 100% over the price of comparable space in the U.S.
Ben, can you tell if the writer was using square feet or square meters? Singapore converted to metrics in 1970, but still uses the English system sometimes. If the writer was using square feet, that would make Singapore industrial space 20 times as expensive as the U.S. That could be a real problem!
‘Lenders in Taiwan are more cautious and selective in pursuing cross-strait loans as their China exposure continues to grow, local bankers at the Asia Pacific Loan Market Association’s conference in Taipei said last Wednesday.’
‘The new rules are not the only thing prompting lenders to examine their PRC exposure closely.’
“Concerns over the Qingdao port scandal and credit-default risks of Chinese privately owned enterprises have also curbed Taiwanese banks’ appetite for China loans,” Taipei Fubon’s Chan said.’
‘Bankers said obtaining internal credit approvals on China-related financings had become more difficult of late. “Our head office recently told us to stop participating in China loans and to submit supplementary reports on the ongoing deals to explain reasons for joining,” said a Hong Kong-based loan banker with a Taiwanese bank.’
“The hearing heard from real estate agents that many Chinese buyers regarded the potential maximum $85,000 penalty for illegally buying an existing home as a ‘cost of doing business’ in Australia. Demand from Chinese buyers is expected to stay strong in coming years – particularly in the upper reaches of the market – as they move to shelter capital from the Chinese government and provide housing for their children’s education, according to industry experts.”
That’s a great idea! I wonder if the California government might look into a similar measure? It would be a fantastic way to raise revenues without needing to raid Californian’s bank accounts. And it would be a win-win for China and California, as China has plenty of empty residential properties back home that need investors to snap them up; the savvy Chinese equity locusts who find California too pricy can buy back home.
The other side of the coin: Why should nonresident Chinese investors be able to compete for housing on an equal footing with California residents who pay state and local taxes? How can the CA government even collect a property tax bill from these nonresident investors?
How can the CA government even collect a property tax bill from these nonresident investors?
Wouldn’t they collect via the same leverage that they hold over everyone else in the state: by threatening a lien against the property, which would eventually be sold to satisfy the lien?
Good point.
‘The move to allow local governments in China to raise money directly in the bond market began more than three years ago when it became clear that the mismatch between local revenues and spending burden was no longer sustainable (see charts below).’
‘Internal disagreements had kept the proposal stuck at the trial stage. But formal blessing appears imminent in an amendment to the Budget Law tabled for the fourth reading earlier this week aimed at ending the 19-year ban on direct issuance by local governments.’
‘The pilot programme on local issuance had been notable for market perceptions of implicit central government support. Even though the issuer of record is the local entity, the bonds had been structured in such a way as to effectively nullify local government risk for the bondholder. Investor assumption is that the real risk exposure is to the People’s Republic.’
‘This is now supposed to change. In the latest tweak to the programme announced formally last week by the Ministry of Finance, the local authorities are now to make payments directly to investors and not through the offices of the MoF.’
‘The irony is that success in convincing investors that they are betting on the creditworthiness of the local issuer could well backfire. Demand might evaporate.’
‘Few local governments are seen as able to generate the revenues needed to service their debt. In October 2008 when the idea of local bond issuance was first floated, the state media commented wryly: “If they reveal their books, no one would agree to lend.” This was the perception even before local governments started racking up huge debts to prevent the economy from slipping into recession. This debt reached an estimated Rmb20.7trillion (US$3.4tr) as at mid-2013.’
‘China’s economic performance has taken a plunge this year and Forbes magazine says it’s a sign of the end of China’s four-decade economic cycle. Land sales, which local governments have heavily relied on financially, also show signs of staggering. Experts are saying the real situation is even worse than what the data shows.’
‘Yang Bin, professor at Tsinghua University School of Economics and Management: “In fact, the domestic situation shows economic crisis on many fronts, such as the stock market drop, inflation, depressed industry, and low consumption capacity. It has been like this since two years ago. The data came late.”
‘The regime claims to only use “micro-stimulus” or “targeted measures,” but behind-the-scenes, is pouring cash into China as fast as possible, according to Forbes. In June, they issued 1.08 trillion yuan in new loans. Total social financing rose 40.7 percent since May, while the amount of money in circulation (M2) rose 14.7 percent since last year.’
‘Yang Bin says that the zombie-like state-owned enterprises have become a serious drag on the economy. Yang Bin: “Bank loans only target state-owned enterprises, even though private enterprises have higher operational costs. Without preferential policy, even tax cuts can’t save the private enterprises.”
‘Yang Peichang, economist: “Everyone is holding onto his area. If the reform is conducted in one area, they will question, what about other areas? There is just no way to conduct comprehensive reforms in China. Under such a regime, there is little likelihood of any comprehensive reform.”
‘The decline in the real estate market has taken place in first tier cities such as Beijing, Guangzhou, Chengdu, and Shenzhen. Staggering land sales have also appeared in a number of second and third tier cities.’
‘China economic critic Niu Dao says that China’s real estate crash began with the drop in Beijing’s land sales. The effects of the real estate collapse will be felt in many upstream and downstream chains of the industry, and nearly all throughout the entire economic world.’
‘China’s economic performance has taken a plunge this year and Forbes magazine says it’s a sign of the end of China’s four-decade economic cycle. Land sales, which local governments have heavily relied on financially, also show signs of staggering. Experts are saying the real situation is even worse than what the data shows.’
I assume this development has no implications for the stalwart and miraculous 7.5% economic growth rate of China’s economy?
‘Investors should steer clear of China-listed stocks, says Schroders head of Asian equities King Fuei Lee. Bronze Rated fund manager Lee is cautious about Asian stock markets as a whole – but particularly bearish about China.’
“Three quarters of the MSCI China index is made up of banks and state owned enterprises. These companies’ structural profitability is challenged in my view, due to high levels of debt and poor cash flow,” he said. “The remaining quarter of the index is overpriced.”
‘Lee says that China faces two main structural problems, that companies have over spent – and that this capital expenditure has been fuelled by credit. Over the past seven years Chinese companies have borrowed enough to boost debt as a proportion of GDP by 87%. As a comparison, during the UK’s boom years to the 2007 credit crisis, our debt as a percentage of GDP rose by 50%.’
‘Total outstanding debt as a percentage of GDP owed by companies is around 160% - but this is just the figure loaned out by banks. If you include the shadow banking system the number jumps to 200%.’
‘There is an argument that as state owned enterprises make up such a sizable proportion of the over-leveraged borrowers, this debt can simply be wiped off the books – as both the lender and the borrower are one and the same. But Lee points out that even at the top of the credit bubble Chinese corporates are cash flow negative – meaning if things get tricky their ability to reply on cash flow is limited.’
‘In December 2006, Lee gave an investor presentation with a slide entitled “Still More Signs of Market Irrationality Worrying Us”. Shortly afterwards there was a global recession and stock markets across the world began to tumble. In that slide he identified seven key indicators of market irrationality – five of which he says are now visible in the global markets.’
“The disconnect between the geo-political risks around and the lack of volatility in stock markets worries me for one,” he said. “With the exception of Japan all indices are higher now than they were in 2007 – but fundamentals are nowhere near as positive. Considering the backdrop markets should be lower. Add to that irrational bond yields – US government bonds should not be paying the same as much riskier Spanish bond yields.”
‘Economic data issued on Monday suggested China’s stimulus measures were no longer enough to offset declining investment in the property sector which is suffering from overcapacity. China’s factory sector growth fell to a three-month low in August, according to a private survey published on Monday, and its official manufacturing purchasing manager’s index (PMI) also dipped over the month.’
‘The China Iron and Steel Association (CISA) encouraged end-users to delay orders and run down their iron ore inventories on the expectation of cheaper prices, but traders said a sustained improvement this month looks unlikely. “I think people are mistaken if they think there is going to be a big recovery in September,” said a manager with a Beijing-based commodity trading house.’
“There is probably going to be more steel demand, and some restocking, but there is no solution to the overcapacity everywhere in housing, in iron ore, in steel products,” he said.’
‘The latest CISA figures showed that product inventories at steel mills reached 15.25 million tonnes in mid-August, up 4.68 percent from the first 10 days of the month. Analysts said the increase reflected the reluctance of traders to take on new stock, despite expectations of improving seasonal demand, with prices weighed down by the supply glut.’
“There has been an obvious increase in steel mill stocks that mainly reflects weak downstream demand as well as a decline in trader activity, and destocking pressures are set to increase,” analysts with steel trading portal GTXH.com said.’
‘Economic data issued on Monday suggested China’s stimulus measures were no longer enough to offset declining investment in the property sector which is suffering from overcapacity. China’s factory sector growth fell to a three-month low in August, according to a private survey published on Monday, and its official manufacturing purchasing manager’s index (PMI) also dipped over the month.’
Sounds like a Keynesian clusterfork…
Sounds like a Keynesian clusterfork…
Say it with me: maaaaaaaaal-investment!
‘Chinese investors continue to look favorably on California real estate as Chinese developer Full Power Properties purchased a downtown San Jose property from KT Properties, a Silicon Valley-based real estate firm.’
‘Since 2012, Chinese developers and real estate buyers have been eager to explore opportunities in the California real estate market.’
“From March 2013 to March 2014, more than $22 billion in Chinese money flushed into California’s real estate market,” said Xia Xiang, economic and commercial counselor of the Chinese Consulate General office in San Francisco.’
I remember reading somewhere how Sony or some other Japanese conglomerate had only recently sold the last piece of New York commercial RE they bought during the 80’s bubble. The CHicoms seem to be following Japan’s 80’s playbook. sure there are differences, but so much seems the same, and the shared Asian culture of saving face and the corporate corruption that goes with it might be the Chicoms undoing.
‘In the bustling financial district in Beijing stands the headquarters of Fox Hunt 2014, sitting among China’s financial regulators and institutions. Fox Hunt 2014, a special task force of the Economic Crime Investigation Department (ECID) of the Ministry of Public Security, consists of a group of police officers and specialists that seeks to bring back financial criminals from abroad, or “foxes,” as they refer to them. The agency has brought in over 30 criminals in the month since it started operating on Jul. 22, according to the party-run Global People magazine.’
‘A map on the wall of the headquarters is covered in small red dots marking the possible hiding places of fugitives. Liu Dong, deputy chief of the ECID and the director of the task force, told reporters from the magazine that the number of economic criminals on the run has risen following China’s economic development.’
‘According to data released by the Chinese Academy of Social Sciences in 2011, more than 18,000 former governmental officials fled the country, taking with them over 800 billion yuan (US$130 billion). Another report, published by state-run China News Service in 2006, stated that about 800 financial criminals were in hiding overseas with about 70 billion yuan (US$11.4 billion) of property at that time.’
“Although the number of expatriates has increased, overseas arrests have increased, too,” said Liu. “More than 730 suspects of financial crime have been brought in from 54 countries and regions since 2008.”
‘A former government official in east China’s Jiangxi Province was tried in absentia on Friday in a landmark case to help retrieve smuggled illegal earnings overseas and deter official corruption.’
‘The trial is the first following a revised Criminal Procedure Law went into effect last year, allowing trial in absentia of corrupt officials who fled the country with ill-gotten gains.’
‘Once Chinese courts find him guilty of smuggling, judicial authorities will seek international assistance to get the verdict recognized by the relevant countries, said Huang Jingping, a professor of law at the Renmin University of China.’
“Before we did not allow trial in absentia so when fleeing corrupt officials were still at large, their illegal overseas assets could not be retrieved,” Huang said. “Now, even when the money and assets are transferred overseas, they can still be retrieved,” he said.’
“Anti-graft authorities can seek assistance from their overseas counterparts to seize and freeze, then return the assets of corrupt Chinese officials,” said an unnamed official of the anti-graft bureau under the Supreme People’s Procuratorate.’
‘Laws in the United States, Canada, Australia and Singapore - the favorite destinations for Chinese officials who flee with large amounts of money - all recognize confiscation of illegal earnings in the Chinese rulings.’
‘Foreign joint venture partners of Chinese mutual fund companies fear they will have to bail out investors in one of the shadiest patches of China’s shadow banking system, following two defaults by lightly regulated subsidiaries peddling complex investment products.’
‘While defaults of wealth management products (WMPs) issued by Chinese banks and trust companies have ended in some form of government rescue, there is no precedent for how problems with fund management company (FMC) subsidiaries will be resolved.’
‘In many cases, the arms-length nature of the relationship between parent firm and subsidiary means the former may be unaware of how much risk the latter has taken on. Analysts warn that they may not enjoy the implicit state guarantee extended to other parts of the sector.’
“This can lead to a capital call on the parent, and that’s the doomsday scenario for a lot of these joint ventures, that and the reputation risk,” said an executive at a major FMC joint venture, who spoke on condition of anonymity.’
‘Industry insiders who spoke to Reuters saw that scenario as a likely outcome, given that the agency regulating the subsidiaries is the China Securities Regulatory Commission (CSRC), which has jurisdiction over their mutual fund parents - but none over banks - and so could force them to cover losses.’
‘The two recent cases that have rattled foreign companies involve investment products that have been unable to pay investors interest due at maturity. The latest involves a default by a fund marketed by a group of subsidiaries and partners of Noah Holdings, a Chinese wealth management product (WMP) company listed in New York.’
‘Domestic media reported last week that the fund had experienced repayment problems with a 1 billion yuan ($162.5 million) WMP that was due to mature earlier this month. A legal dispute between the participants has frozen 600 million yuan, with Noah alleging that the funds meant to pay off investors were dishonestly redirected by one of the marketing partners to invest in another project.’
‘In a second recent case, Mirae Asset Huachen Fund Management Co, a joint venture (JV) between South Korea’s Mirae Asset Financial Group Co and two Chinese FMCs, announced on August 11 it had failed to pay more than 32 million yuan worth of interest due on trust loans in July due to project difficulties.’
‘Most of the FMC subsidiaries were created to exploit opportunities in China’s burgeoning high-yield wealth management sector. They have issued more than 2 trillion yuan ($325 billion) worth of structured investment products since they were allowed to enter the market in 2012, according to estimates from Shanghai-based fund researchers Z-Ben Advisors.’
‘Many of those products are backed by loans given to some of the shakiest borrowers in China, analysts say, because the prime assets had already been repackaged into WMPs by earlier, better-funded market entrants such as state-owned banks. “By the time the FMCs were cleared to enter this business in 2012, all the pretty girls were taken,” said Michael McCormack, executive director at Z-Ben.’
‘He said the FMCs in many cases had become de facto loan underwriters, arranging bank loans for desperate companies - in particular over-extended real estate developers - which were then sliced into tranches, repackaged and resold to get them off the bank’s books.’
‘The report said that of the 31 products issued in the first half of 2014 that lost money for investors, the “overwhelming majority” were structured credit products and offshore WMPs.’
‘It is not certain that foreign JVs will end up on the hook - regulators could let the investors who purchased the products take the full hit if funds blow up. But that would risk setting off a panic among domestic investors and by extension risk a wave of bankruptcies among desperate corporate borrowers who have few funding alternatives to stay afloat.’
‘Because the subsidiaries are technically middle-men, not lenders, analysts say they have generally skipped executing due diligence on the assets they packaged, and were only required to maintain a negligible 20 million yuan in cash reserves.’
“What’s about to begin is a chain of passing the hat,” said Z-Ben’s McCormack. “These subsidiaries weren’t doing anything different from anyone else in the business. They don’t do any due diligence either.”
‘A top international investment strategist believes that Australian banks need to start rationing credit to avoid further inflating a housing bubble and “extend the boom”.
‘Paul Schulte of Schulte Research International, a Hong Kong-based independent research house focused on banks and corporate credit in emerging markets, claimed leverage levels in Australian banks were “getting very high’’.
“The leverage levels in the Australian banks are getting very high, whereas in the crisis they were low and Australia was looking great. Now they are some of the highest in the world and the loan-to-deposit ratio is very much on the high side,’’ he told The Australian.’
“If there is any sort of disruption in the world it is important for the Australian system to be able to slow down the pace of credit growth and ration it. That will spread out the property price appreciation, it will extend the boom.’’
‘According to quarterly APRA data, the domestic home loan market expanded to $1.23 trillion by the end of June, up 2.5 per cent from March and 8.6 per cent on a year ago. But loans held by investors — considered riskier because they are more vulnerable in a downturn — rose to $413.5 billion, up 3.3 per cent from March and 10.9 per cent ahead of the previous year.’
‘In addition, ANZ, Westpac, Commonwealth Bank and NAB grew their interest-only mortgages 12.8 per cent from the previous year to $369bn and have approved an additional $7bn in the past three months. The big four, which are deemed “systemically important” by APRA, also increased approvals at loan-to-value ratios above 80 per cent by $2.2bn in the past quarter.’
‘Home loans make up two-thirds of bank loans in Australia and ratings agency Moody’s said recently that Australian lenders had sold $3bn worth of non-conforming or sub-prime home loans over the last 18 months.’
“If you just slow down credit, either by doing it directly through interest rates or do what many central banks are doing in terms of putting curbs on the banks to how they can allocate credit. That has happened in Hong Kong, China, Korea and Singapore, but not Australia,’’ Mr Schulte said.’
“That would be a very wise move right now. To extend the boom by rationing credit rather than allowing credit to exhaust itself too quickly. That is when you get into real problems — when credit is extended too quickly and it tends to go into unproductive purposes like real estate.’’
‘Chinese nationals have been buying U.S. residential real estate at a fast clip for the last few years. Now they are building it, setting their sights on some of the priciest parcels of land in the hopes of attracting U.S. and Chinese buyers alike.’
“The Chinese real estate market is very competitive, and the U.S. housing market is recovering and expanding rapidly, so for us as a company to invest a certain amount in the U.S. makes a lot of sense for us,” said Tian Ming, chairman of Landsea, a China-based developer, through an interpreter.’
‘Landsea, which bills itself as China’s “pre-eminent green builder,” is investing $1 billion in the U.S. housing market, beginning with three new developments. It will build condominiums in the New York City market, townhomes in San Francisco and single-family homes in the Los Angeles area.’
‘ Lennar has already enjoyed great business from Chinese buyers in its Southern California housing developments. Chinese parents are flocking to California especially, buying homes there so that their children can attend American high schools and universities. Lennar, and other U.S. builders, have even implemented Feng Shui design in some of their homes to accommodate the Asian buyer.’
“China’s investment is spiking now because there is a fear by many Chinese nationals that their capital is not secure in China itself, and so they are looking for other places to invest,” said Ben Thypin, director of market analysis at Real Capital Analytics.’
In the past, you could sell a house soon after you bought it, but now it’s impossible to sell it. No one would take it.
There’s that liquidity thing again…
An investment in housing used to seem incredibly safe, not only because it was going up up up, but also because the market was extremely liquid; with everyone primed to buy housing, it was a trivial matter to unload a property quickly.
With the herd turning away from housing as an investment, suddenly that sea of liquidity has gone out.
‘UK authorities have been warned that attempts to establish London as a hub for Chinese currency dealing could be scuppered by the increased use of the renminbi by money launderers. Anti-money laundering specialist Anomaly42 said the increased scrutiny of international dollar-based wire payments from US authorities has pushed criminal attention towards the renminbi, which carries less banking and regulatory scrutiny.’
‘Anomaly42 said there were “clear ramifications” for UK authorities, as global money laundering is estimated to reach between $1.4trn and $3.6trn annually. The company added that countering money launderers offers Chinese authorities an opportunity to make the renminbi the “default global currency” by setting a “golden global standard”.
‘Director of strategy and innovation at Anomaly42, Freddie McMahon, said today’s money launderers have become “highly sophisticated” and monitor the “every move” of banks and regulators. “Relative to the dollar, the renminbi is off the beaten track and affords a new level of camouflage for criminal transactions.”
‘In July, the company said developments in financial crime technology could uncover a £250bn “storm” of money laundering fines. It said the global use of technology to scan for financial crime will expose a “countless” amount of banks by 2020.’
‘Chinese tycoons with US immigration plans face another obstacle before the end of next month as the US citizenship and immigration service is reported to stop issuing EB-5 visas, following Canada’s cancellation of its investor immigration policy earlier this year.’
‘Due to a surge in applications from Chinese citizens, the United States’ quota of immigrant-investor visas offering quick permanent residency has been exhausted, with the Department of State announcing on Aug 23 that the EB-5 program had reached its quota for Chinese nationals for fiscal year 2014, which ends on Sep 30. The program will reopen for Chinese on Oct 1, 2014, the start of fiscal year 2015.’
‘It is the first time the number of Chinese applicants, accounting for 85 percent of all claimants for EB-5 in fiscal year 2014, has reached the limit since the program started in 1990.’
Follow the money.
“The property-market slowdown in China “looks increasingly serious for steel demand next year”
Iron ore on cusp of fresh five-year low
http://www.smh.com.au/business/markets/iron-ore-on-cusp-of-fresh-fiveyear-low-20140903-10boix.html
Iron ore is flirting with a five-year low as a global supply glut and a slowdown in China’s property sector threaten to push the metal even lower.
Overnight, iron ore fell to a fresh low of $US86.70 a tonne overnight, the price it reached in early September 2012. Should it fall below that price, it will hit its lowest since October 2009. The metal has fallen more than 35 per cent this year.
The fundamentals of the iron ore market are weak at the moment and China’s housing sector still has further to fall before it recovers, ANZ head of commodities Mark Pervan said.
“It might be that the market is ok with that, but a downward trend doesn’t allow for a recovery in price. Our view is that the housing market won’t start recovering until the second quarter of next year, and that will be where it’s bottoming,” Mr Pervan said.
….New-home prices in China, which buys about 67 per cent of seaborne ore, fell in July in almost all cities that the government tracks, boosting concern that economic growth is faltering. While demand for iron ore was sluggish, supply is spectacular, Roper said, China’s largest brokerage by market value.
“The oversupply situation is only going to worsen over the next few years,” said Roper. The property-market slowdown in China “looks increasingly serious for steel demand next year,” he said.