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Observations On The Chinese Real Estate Sector Following The Biggest Price Decline In 5 Years

Tyler Durden's picture




 

Two days ago we indicated that something quite material could be happening in the Chinese real estate market. Quoting from Market News, we reported that "Prices of new homes in China's capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city's Housing and Urban-Rural Development Commission." And while many dismissed these news as merely a property specific ASP rotation, what followed was a downgrade of the Chinese property sector by Moody's citing an expectation of "credit conditions to worsen in next 12-18 months for developers" at which point we decided to dig in deeper. It appears not all is as good as the apologists would like to claim. Because while the average selling price in Beijing plunged by 34%, and that in Hangzhou by 26%, the drop was very substantial and rather pervasive pretty much everywhere else as well. From Citi's Oscar Choi: "ASP- down 7% MoM in March, biggest monthly drop in the past five years. In January and February, ASP in most key cities still maintained an upward trend. But entering March, ASP achieved in 18 key cities dropped by 7% MoM, and Beijing’s and Hangzhou’s ASP achieved were down 34% MoM, Hangzhou down 26% MoM." Well, it took about a year for the unbelievers (and infinite for Ben Bernanke) to realize that contrary to expectations, subprime was not contained. It will probably take the China apologists the same amount of time to agree that the biggest drop in real estate prices in 5 Years and a 7% countrywide plunge is the beginning of the end for the bubble. And while it is not so much the question of what properties make up the average ASP, or what the high-low priced composition is, the question is what happens next now that highly leveraged speculators are unable to flip properties on a monthly basis, and as a result have to create other bubbles elsewhere.

More from Citi:

We checked with the transaction details in the two cities, and the significant drop in March ASP was due to the change in product mix transacted in the period. For example in Beijing, in March, the number of high-end property units (ASP>RMB30K/sqm) transacted only accounted for 7.4% of total units transacted (25.2% in Feb), while low-end units transacted (ASP<RMB16K/sqm GFA) jumped to 36.5% of total units transacted (Feb of 9.9% only). Most of the other cities had similar situations. Local governments have kept strict pre-sale permit controls for high end projects while they encourage more launches of low-end projects, and the change in product mix should result in an ASP decrease.

In February, due to seasonality factors and the impact of the new tightening measures, most developers recorded a sharp decrease in monthly sales, which was fully expected. The monthly sales in March showed a decent rebound MoM, on average increasing by 36% MoM. But the magnitude of the rebound was weaker than expected, especially as Agile, CRL, Greentown, and Longfor all recorded MoM decreases in March. It is apparent that all of the four  developers are focused on the high end, which implies that the high-end residential segment has been suffering more in the tough operating  environment. Local governments keep a close eye on ASP and technically manipulate the launch schedule of high-end residential projects.

1Q11 land supply dropped a lot, down 37% QoQ and down 23% YoY. In 1Q, the governments in the top 120 cities released 96.61m sqm of  residential land supply into the market, down 37% QoQ and down 23% YoY. As expected, in the first three quarters of 2011, the local  governments only have limited land resources to be supplied into the market, in order to first satisfy land demand for social welfare housing construction of 10m units. In 2Q, we expect there will be even less land supply in the market. The land market should enter the winter period in 2Q/3Q.

 

Expect to hear much more on this matter once the ostriches are forced to pull their heads out of the sand. And, even more importantly, look forward to see what the PBoC's reaction will be should it realize the sector that is that biggest marginal consumer of debt is now in freefall.

 

 

 

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Fri, 04/15/2011 - 12:09 | 1172767 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Tyler,

Please shorten the length of the commenter's opening paragraph (on the top of the page).  Sometimes they are so long, I can not read the headline.  Please consider.  Thank you.

Fri, 04/15/2011 - 15:19 | 1173616 oh_bama
oh_bama's picture

Seriously Tyler, this data must be a joke.

I monitor prices of some high end properties in Beijing and HangZhou and they are basically flat. THe ASP is a lot lower because a lot of the sales happened in far-away districts outside of loop-5 in Beijing. It is like using Stockton, CA prices to "average" with prices of houses steps away from Stanford. To mislead people was the whole point.

Fri, 04/15/2011 - 12:17 | 1172795 PY-129-20
PY-129-20's picture

Burkina Faso is the next country in trouble. Heavy gunfire, soldiers pillaging the capital and so forth.

http://www.guardian.co.uk/world/2011/apr/15/burkina-faso-capital-erupts-...

Fri, 04/15/2011 - 12:22 | 1172825 falak pema
falak pema's picture


burkina has always needed a face lift...faso lifto...but this photo taken on april's fool's day could fool anybody into believing that face lifts come free as part of country's constitution.

Whence the current unrest. Where are our free face lifts??!!!!

Fri, 04/15/2011 - 12:59 | 1172979 TonyV
TonyV's picture

Burkina Who?

Fri, 04/15/2011 - 13:04 | 1172991 magpie
magpie's picture

"Burkina Faso with nuclear weapons"

Ah, those were the heady days of Western dominance...

Fri, 04/15/2011 - 16:11 | 1173877 SME MOFO
SME MOFO's picture

Homer: Burkina Faso? Disputed Zone? Who called all these weird places?

Fri, 04/15/2011 - 12:20 | 1172807 humblepie
humblepie's picture

The PBoC will order the banks to start lending again. Should the banks fail, central government will swap the bad loans with triple rated government debt (AGAIN). The trick is how to balance that with surging commodity prices. My bet is for the ball to drop in the juggling act.

Fri, 04/15/2011 - 12:20 | 1172808 JollyRoger
JollyRoger's picture

So what happens to foreign demand for US debt when Japan enters a tsunami/nuclear crisis and China enters a real estate depression?

Fri, 04/15/2011 - 12:26 | 1172846 Bicycle Repairman
Bicycle Repairman's picture

Household demand.

Fri, 04/15/2011 - 13:27 | 1173113 Bleeping Fed
Bleeping Fed's picture

UST's become a coveted safe haven once again, or so the story goes...

Fri, 04/15/2011 - 12:22 | 1172810 jt17
jt17's picture

I just spent four months in Beijing and actually inquired about real estate.  Things are actually going exactly the way the gov't wants them to.  Some things you should all know:

-it is official gov't policy to kill the real estate bubble but allow the gradual rise of the stock market.

-Builders are not allowed to price new developments above the price of nearby buildings.  Non-Beijing residents are not allowed to buy real estate in Beijing.  Beijingers need to put down a 30% downpayment on their first home.  Mortgages are not allowed to be taken out for second homes.  Foreigners are not allowed to buy property unless they can demonstrate one year of work/tax history in Beijing.

-look for all that excess liquidity to move into the stock market, real estate in foreign markets like Hong Kong, or real assets such as gold.

Fri, 04/15/2011 - 12:29 | 1172863 ivana
ivana's picture

thanks for fist hand experience. Was expecting promt gov reaction but did not know details

Fri, 04/15/2011 - 13:13 | 1173035 goldfish1
goldfish1's picture

Very informative.

Fri, 04/15/2011 - 13:31 | 1173132 Bleeping Fed
Bleeping Fed's picture

It's also official government policy to reduce inflation.  You think that's going exactly the way the government wants?  Where exactly did you inquire about real estate--the Ministry of Truth???

Fri, 04/15/2011 - 12:22 | 1172816 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

You can't eat houses. You can eat chinese.

Fri, 04/15/2011 - 12:25 | 1172821 falak pema
falak pema's picture

So now what is the next one to fall? 

Fri, 04/15/2011 - 12:27 | 1172841 topcallingtroll
topcallingtroll's picture

does anyone think the whiff of deflation in the air is getting stronger?

I am feeling at least an intermediate top soon.

Is it too simple to think that inflation and money printing fears will keep the markets floating until the end of qe2, and then all risk assets are hit?  Including gold and silver?

Fri, 04/15/2011 - 12:29 | 1172850 topcallingtroll
topcallingtroll's picture

they changed the capcha!

Now you have to put in real answers rather than hit the save button three times.

Fri, 04/15/2011 - 12:28 | 1172847 PulauHantu29
PulauHantu29's picture

My friend moved to HK last year for a job. An apartment (1,850 sq ft) in the CBD costs over $1.8 Million....and he would still have to take a bus to work. He said wages: RE prices are more out of whack in HK and China then they were here in 2004-2007.

I am a Happy Renter now. They can raise the RE taxes to pay for all their Massive Deficits, Champagne Parties and $28 Million pension plans for school administrators all they want....go ahead...make my day!

Fri, 04/15/2011 - 12:27 | 1172852 ivana
ivana's picture

Chinese housing was bankster & chairsatan wet dream ... you could have seen that in all MSM puppets.

Gov will sove it without pain.

Now what BB?

Fri, 04/15/2011 - 12:44 | 1172930 cocoablini
cocoablini's picture

Chinese real estate is a local issue, not a nationally controlled issue. So local governments can only make money by selling real estate. their tax system is really not up to snuff. so of course the national government wants to kill the shadow, local banking government competition.

Fri, 04/15/2011 - 12:51 | 1172945 Ruffcut
Ruffcut's picture

"build it and they will come."

Maybe they are making room for the Japanese refugees.

I thought you would end up with ghost towns, not start with them. I guess ghosts need somewhere to hang their hat, too.

Fri, 04/15/2011 - 12:58 | 1172965 FIAT_FixItAgainTony
FIAT_FixItAgainTony's picture

and let us not forget the fallout contamination zone so thoughtfully provided by japan.  people need land and yes, this is a global land/money grab.  why do TPTB need so much $$?

any videos of the "arks" as seen in the 2012 movie?  they sure looked expensive.  just sayin.

Fri, 04/15/2011 - 13:10 | 1173007 goldfish1
goldfish1's picture

the question is what happens next now that highly leveraged speculators are unable to flip properties on a monthly basis

Sell their gold?

Fri, 04/15/2011 - 13:23 | 1173090 chinaguy
chinaguy's picture

The housing market in China will do whatever the Party wants it to. They can slow it down or pump it up at will - watch the legislation at work and you divine their thoughts. 

Fri, 04/15/2011 - 15:18 | 1173607 Miles Kendig
Miles Kendig's picture

Great observation, as always chinaguy

Fri, 04/15/2011 - 13:44 | 1173211 sunny
sunny's picture

When the housing bubble popped in the US, the markets went pretty much straight down.  Both Shanghai and Hang Seng markets are near multi-month highs.  I guess they don't know how to crash like we do.  Are they immune? 

sunny

 

Fri, 04/15/2011 - 13:53 | 1173253 AldousHuxley
AldousHuxley's picture

Will China become Japan II? inflate from being pegged to US dollar printing, then deflate to the point where the economy can't ever recover?

 

Fri, 04/15/2011 - 14:01 | 1173294 random shots
random shots's picture

God Bless, America!

We have now taught a second country how to burn all their life savings by speculating in real estate. First Japan, now China!

Coming soon....100 Year Mortgages in Shanghai!

Fri, 04/15/2011 - 15:13 | 1173577 Miles Kendig
Miles Kendig's picture

Hell, even I seen it coming ..

6.  The CPF index (Chinese Pig Farmer – A basket of the favorite holdings of this intrepid class of investors) will continue to display attributes of bubbleiciousness, with some great churn potential as long as the fed’s policies remain in place, re: #5.  The day will come, rather soon I suspect when the fed will be forced to move to “stabilize” the CPF as it follows Buzz Lightyear and the CME to infinity and beyond.  I also suspect that there may be a change in CPF domestic weighting away from RRE into their favorite metals generally and ag in a more limited way.

http://www.zerohedge.com/article/guest-post-how-can-everyone-be-so-incom...

 

Fri, 04/15/2011 - 19:41 | 1174714 htp
htp's picture

Tyler, you should really hire someone who can read Chinese.

Here is a website tracking Beijing real estate prices:

http://house.focus.cn/ztdir/house_1104dazhe/index.php

It clearly states that "less than 2% of new homes have seen actual price declines", and those declines are typically less than 4%. The vast majority (>98%) are either flat or still rising.

There are literally hundreds of Chinese language websites and millions of Chinese actively tracking real estate prices all over the country. The ministry of truth can't deceive the 1.3 billion Chinese, but apparently they can still fool Western investors. Sad.

Sat, 04/16/2011 - 01:17 | 1175360 TGR
TGR's picture

Glad you mention it, though no intended slight on Zerohedge whatsoever (no need to praise the work of what every reader of this site already knows).

Being a long-term expat, over the past decade or more I have literally given up on attempting to shine light on China 'news' that is just plain wrong or taken completely out of context.

Simon Black, aka 'Sovereignman', has been one such habitual offender to the point of ridiculousness. His 'exclusive', "you read it here first folks" claims have bordered on criminally negligent.

Claims like "2009 is the first year Chinese have been allowed to own gold" (wrong), 'gold in Hong Kong is the cheapest on earth - great arbitrage play' (wrong); the "Chinese  government is literally cramming it down people's throats on every corner to by gold" (utter horse-shit, and a disservice to the gold community) - to name but a few - make a mockery of the fact that there are literally tens of thousands of  Chinese-literate Western investors, businessmen, precious metal-traders etc in China.

What, and a blow-in like Black breezes in for 5 minutes and makes outlandish claims to the detriment of PM holders the world over? For heaven's sake.

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