Big Trouble in Little China

In his weekly letter, John Mauldin provides us with more signs of stress in Chinese property markets. 

 

The following is an excerpt from a report issued by Simon Hunt included in John’s letter:

The
scale of speculation in real estate is enormous. There is a total of
64.5 million apartments and houses lying purchased but vacant in urban
China, about five times the surplus in the USA, according to an
economist from the Chinese Academy of Social Sciences.

A
report written by the National Bureau of Economic Research in July this
year provides interesting data on China’s housing market. Real housing
prices have risen by 140% since the first quarter of 2007. In the first
quarter of this year, house prices rose by a record 41%, since when it
appears that prices have stabilised but not fallen. Price increases have
not been driven by any shortage in housing.

In
Beijing, there has been an almost eight-fold increase in land values
since 2003, but since the end of 2007 land prices have nearly tripled.
The impact of rising land prices on home and apartment prices has been
equally great. From 2003 to 2007, the ratio of land-to-house values
hovered between 30% and 40%, but since then it has doubled to just over
60%. The report also found that when a central government state-owned
enterprise (SOE) was a winning bidder for land, prices rose by about 27%
more than if they had not been involved, thus showing the influence
that SOEs bring to bear on land values, an influence that grew in 2009
when they became more active. A separate report shows that so far this
year 82% of Beijing’s land auctions have been won by SOEs.

Price-to-rent
values in Beijing and seven other large markets across the country have
increased from 30% to 70% since the start of 2007.

In
summary, against a background of cheap money and plenty of credit,
house prices across the country have become unaffordable to most
first-time buyers. In Beijing, for instance, average house prices have
been between 14 and 15 times incomes for the past three years, but rose
to 18.5 times in the first quarter of this year.

The evidence appears to be stacking up
against the few remaining property bubbles around the globe.  As we’ve
stated previously, an economic hiccup in China is not a prerequisite for
a bursting Australian property market, as bubbles of this magnitude
often collapse under their own weight.  But we certainly don’t mind
having multiple potential catalysts when evaluating the risk/reward of
investment themes.  In this case, our Chinese Pin appears to be pointed
directly at the Land of Oz.  The potential consequences are alarming . .
. even to Jack Burton!!

 

Comments

[Richard Whitney]

@Sudden Debt...Imagine that every big city mayor in the United States had strong economic incentive to increase the local GDP. And imagine that the fastest way to get that bigger GDP number was to build something, anything. Further, imagine that those mayors had the power to coerce the banks (which don't need that much coercion, due to their own incentives), and that those mayors could grease the gears for any developer willing to put something up. Add to the picture that the incentives are large financial sums for success, and jail or death for failure.

Now, you are thinking of your own local big city mayor and thinking, wow, that crook would go to town! He would just build malls and office buildings and apartment building with no concern for any demand by shoppers, businesses or households.

OK, that is China, only without the scintilla of rule of law that might pain the tiny conscience of the rare thoughtful mayor here.

[Shameful]

God do I love that movie.  It started a life long love affair with kung fu flicks...I think I might have to watch it now.

Also there are bubbles all over.  This looks to be one, but it remains to be seen if it will be like the property burst in the US or back in the day with Hong Kong.  Looks bad, but at least their economy actually makes things...other then fraud which they have a hand in as well.

[cobra1650]

China = largest ponzi in history = ending similar to Wile E Coyote anvil scene

[Erra]

1. That was a good movie.

2. Those houses aren't as BIG as the US houses. mostly they are 1 room appartments.

Also chinese tend to be corrupt as hell. If they don't rent out the houses, they don't need to pay taxes on it.

Most chinese don't have a official adress in the metro cities. They come from the country side to work for a few years in the cities to save enough money to buy a house in the country side.

 Some food for thought;  While the housing inside the major cities are often apartments, they are not by default small. When you look at Hong Kong(which has some of the most expensive real estate/land value in the world due to population vs available land) your statement is true, but if you look to the mainland, there is plenty of evidence that homes are only getting bigger and are on par with the size of homes in the United States. The problem you see on the ground in China in areas like Guangdong(I am located in HK, on Guangdongs doorstep) is that while there is a lot of new and modern buildings being feverishly built, there are little to no occupants as the largest part of the population are unable to afford the sky rocketing home prices. The articles you continue to read regarding empty condos littering the landscape in the major urban areas are definitely a reality when you see it with your own eyes. One only needs to take a bus tour of Shenzhen(directly across the border with Hong Kong) which will take the coastal highways, you will see loads of brand new condos that you can see the sun shining right through(no people or objects inside to block the window). It is actually pretty creepy to tell you the truth. The on paper value of China's riches are very, very hard to quantify. When you visit the mainland, it feels like everything you read about China's economic might is just a pretty mask to cover up the rot underneath.

1 + 1 = ...

[Sudden Debt]

oke, thx for the info. but why do they keep building? what's the incentive?

[Shameful]

Because they can't quite figure out how to dispose of 300 million excess young men?

[SteveNYC]

Keep the peasants busy. Same reason we had a census here....

[RighteousRampage]

Hang on to your six demon bag,  it's gonna be a bumpy ride!

[Sudden Debt]

1. That was a good movie.

2. Those houses aren't as BIG as the US houses. mostly they are 1 room appartments.

Also chinese tend to be corrupt as hell. If they don't rent out the houses, they don't need to pay taxes on it.

Most chinese don't have a official adress in the metro cities. They come from the country side to work for a few years in the cities to save enough money to buy a house in the country side.

1 + 1 = ...

[Grand Supercycle]

SP500 important chart update :

http://stockmarket618.wordpress.com

[gringo28]

this piece is so riddled with false comparisons, inuendo and inconclusive commentary that it's not even worth picking apart. the major flaw of course is that unlike all other economies, China continues to fund internal growth with a positive trade balance. who exactly is going to call so-called bad loans? Timmy and Barry certainly aren't.

[VK]

Cash flow. 23pc of the loans are not going to be repaid and 27pc won't be fully paid. Also rising house prices are causing serious internal unrest as poor people are priced out from the housing market and women won't marry someone unless they have a house first. So if house prices fall, the middle class will be wiped out. If they don't fall, the poor are going to riot. 85pc of people in Beijing can't afford a house, yet vacancies remain very high. Housing is for people to live in, when it becomes a luxury item, expect social tensions.

[Dr. No]

"and women won't marry someone unless they have a house first".  I wish we had that luxury here in America.  Our system requires men to buy houses after they are married due to women's demands.

[Species8472]

There is a total of 64.5 million apartments and houses lying purchased but vacant in urban China, about five times the surplus in the USA

So, how does that compare on a per capita basis, or just the middle class?