The Chinese Real-Estate Bubble Has Gone Parabolic: Land Prices Soar 50% In One Year

Tyler Durden's picture

The saying goes "when in a hole, stop digging." In China, conventional wisdom appears to be flipped on its head as follows: "when facing a massive real estate bubble, keeping blowing." That is the case at least according to the following chart showing the average price of land, the main ingredient of the property world, in the top 100 Chinese cities, which as of May has hit a record 3,100 Yuan per square meter.

As the WSJ calculates, the average land price per square meter for the top 100 Chinese cities in the first five months of this year jumped nearly 50% from same period last year, citing Wind Information. More stunning is that according to Wind, some land prices are even higher than asking prices for fully-built houses nearby.

You read that right: unbuilt land in many places in China now costs more than fully-finished apartments.

Some examples of how the government itself, through SOEs, is pushing the real-estate bubble on a parabolic path that will lead to an unmitigated bubble explosion.

  • State-owned developer Poly Real Estate bought a piece of land in a Shanghai suburb for 5.5 billion yuan ($835.5 million) last month. This translates to roughly 44,000 yuan per square meter of buildable space. This is more than what full-built houses in the region sell for, with the average price at around 40,000 yuan per square meter. After taking into account construction costs, taxes and other expenses, property prices would have to nearly double for the developer to make money.
  • A property subsidiary of China Gezhouba Group, a state-owned builder of power plants and dams, spent 3.3 billion yuan last month to buy the most expensive land, in terms of price per square meter, in Nanjing. Another state dam construction company, Power Construction Corp. of China, snapped up a piece of land in China’s bubbliest property market, the southern metropolis of Shenzhen, for 8.3 billion yuan.
  • Cinda Real Estate, a subsidiary of state-owned “bad bank” China Cinda Asset Management, has splurged on at least 35 billion yuan of land over the past year, even though the market value of the company, listed in Shanghai, is just 7.3 billion yuan.

Behind all the ludicrous transaction? The Government. And while we understand that the ultimate debt issuers are government-owned entities, the question of where the money comes - ignoring the ultimate guarantor - from is still applicable.

The answer: mountains of new debt.

The WSJ reports that to fund the purchases, Cinda’s net debt has swelled to more than three times its shareholders’ equity. It still managed to raise 3 billion yuan last month in a bond financing at 5.5%, mostly because of its state backing.

And since the company is backstopped by the government, it will be able to issue even more debt before it inevitably defaults on its obligations, leading to yet another zombie company which can not be liquidate due to Beijing being on the hook, yet which can no longer operate.

As the WSJ puts, it, "the domestic bond market and growth in asset-backed securities have made financing easier for developers, causing companies to chase whatever assets they can."

Which really boils down to one simple admission: it's a bubble.

It gets better: continuing "reforms" of state-owned enterprises could also be a trigger, as these firms have incentives to inflate their balance sheets to gain clout in consolidation talks. For some which have already invested heavily in real estate, keeping land prices high makes sense. In other words, to keep the value of their collateral high and avoid insolvency, the firms are forced to "paint the tape" and buy even more assets at ever higher prices.

And since the money comes from naive bondholders who are convinced they may even get repaid one day, this reflexive charade will continue for a long time until one day China, too, will realize that one can't create money out of thin air in perpetuity and live happily ever after.

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NoDebt's picture

I think the plan is to peddle insanity long enough that all the sane people die off.  Then utipia will be achieved where starving people will believe they are wealthy to their last breath.

 

TradingIsLifeBrah's picture

Lobster was once only eaten by the poor but with some crafty marketing now you feel wealthy eating it.  Rat meat will see this same turn around within the next 20 years.

neidermeyer's picture

Lobster used to be so plentiful that Massachusetts has a law limiting how many times a week it can be served in prisons , orphanages and mental hospitals.

TradingIsLifeBrah's picture

One day we'll tell our grandchildren about how rats roamed freely through subway stations

beemasters's picture

So if they were buying up Vancouver and Australia, who's buying up their land? But then, at 3100RMB per square meter (ie. $47/sq ft), it's still cheap for an inner city plot.

TGR's picture

The land technically isn't for sale; they are buying land-use rights, typically on terms of 50-70 years. After that, it's back on the market, with the local landlord (govt) rinse and repeating.

But nowhere anyhow could an average joe in any major city in China get their hands on inner city land at 3100rmb/m. Impossible. Unless you sweeten the deal by investing multiple millions and intend to create jobs or create demand for surrounding industry.

Peanut Butter Engineer's picture

It's tax free for a reason, I call these Chinese deeds prepaid tax plan of 70 years vs Uncle Sam's post paid annual tax plan with adjustment for inflation and will of politicians.

The Duke of New York A No.1's picture

Vancouver is still cheap - relative to the Tier 1 cities.

TradingIsLifeBrah's picture

If you assume 50% annual appreciation in perpetuity, its never been a better time to buy real estate...

Bay of Pigs's picture

And where is pitz to tell us prices are falling and there are no Chinese buyers around?

GTFO....so sick of the bullshit being peddled on this issue these days.

TheRideNeverEnds's picture

In finance it is only a bubble if it pops. If ten years from now if prices are 10,000x higher was it a bubble now or a great time to buy. Just like the S&P, if it's @6000 after Hilary's first term will now have been a bubble?

DaBears's picture

Sure, but a bowl of rice cost 100,000x. By then physical cash is king, because at least with cash, I have something to wipe my ass. Oh, and the system of Barter and exchange will become robbing and looting.

TradingIsLifeBrah's picture

Take notes PPT, we need this with the S&P.  Except we're going to need it this week instead of year over year.

maskone909's picture

Buying land in china? Yeah not the best investment. But probably better than here. Sad sad stuff bro.

Yen Cross's picture

 

   Get to work building those fake sand castles > 683.76 -47.09 -6.44% BTC/USD

Pliskin's picture

Are those the 'Fake Sandcastles' that at least 8 other countries, including the U.S. are getting their knickers in a knot over?

Such a hoopla over some 'Fake sandcastles' Boggles the mind, what?

RockySpears's picture

I think these are the Sandcastles:

 

https://www.rt.com/viral/337501-china-new-apartment-crumbling/

 

Originaly the video showed the wall literally running out like sand from the cavities.  Original video seems lost now,

 

RS

1percent____________bottom's picture

More interested in knowing who's the seller. Nearly sure the land was owned by some politician, cashing out at peak price and playing with taxpayer money.

neidermeyer's picture

So how much is all this in real money?

Bunga Bunga's picture

Where the money comes from? Stupid question. The land goes as collateral on the bank's balance sheet while it creates credit (increasing a number in the book) in exchange. It worked the same way in the US, but since government is involved in China everywhere, the game is totally skewed. Get some popcorn ready, when this unwinds, it will be fun.

Baby Eating Dingo22's picture

Well, you know what they say: They ain't making more of it

Grab it now or get stuck living in the sea

 

J Mahoney's picture

Not sure where ZH got this story but I question it -- people dont buy land in China--the government owns it all. You basically give them money for a 70 year lease. Yep, thats right---not like here, you buy a house or farm and can pass it down to heirs--not there.

Condition 1SQ's picture

I'll be damned, it appears that you are correct.  Of course, technically, if you have to pay property taxes, all you're doing is renting.

 

There are parts of Alaska with no property taxes or building codes.  It's the only state I know of with such land available for purchase ..

Pliskin's picture

You're exactly right, I heard 100 years, but it may of changed.  Also if you work for the government, from street sweeper all the way up to CCP hierarchy, you get a home for free, which you can pass on when you die, this is a fact, as my wife has two homes (Mother's and Father's) which  she rents out. 

If the government ever wants to take it back they can, as the rule is that ALL land is owned by the Gov.

Peanut Butter Engineer's picture

Deeds in China can also be past down to heir.

Just consider the fact that their land is tax free which in actually it is a prepaid 70 year tax plan vs our land which is on annual post paid plan with annual rate adjustment on your land worth. I say I'll take the Chinese prepaid plan since it's cheaper in the long run with up front cost. The kids later will have to learn if they want to continue the 70 year prepaid tax plan after I'm dead.

For a person of 30 years old to buy a house that has 70 years lease, I think it's just about right for me.

TradingTroll's picture

Remember  many new buildings in China are on land the developer  got for FREE from the government.  The government  stole the land by forcibly  removing peasants. Then the Red Party crony developer gets the land for free, develops it, then makes a gift to the Red Party.

 

Just another contrived market...nothing to see here folks...

personal109's picture

Just like Mayor Lee's San Francisco.

tarabel's picture

 

 

Classic late bubble lending scheme. I sell to you. You sell to my cousin. My cousin sells to your grandmother. Every sale at a higher price than before. Then we borrow the shit out of it based on the new-and-improved land value and walk away rich.

RagnarDanneskjold's picture
Flour More Expensive Than Bread: Second Tier Land Prices Soar 180 pc

Almost all the land purchases are backed with debt. 

How Long Can Land Prices Keep Rising

Some of the companies buying land have no core real estate business, they're putting cash to work because stocks are down.

SOEs and Financial Companies Push Private Developers Out With Insane Land Grab

It helps having the biggest backers possible too.

Ministry of Finance Owned Cinda Real Estate Becomes Land King
ThrownOffZHTwice's picture

No wonder they are moving their money to the US and Canadian housing markets.  Laws need to be passed to prevent the purchase of homes by foreigners, especially Chinese.  Sounds like the Chinese need something like the plague to thin them out.  I hope they do not come here. 

U4 eee aaa's picture

This is so pathetic. I used to have a lot of faith in the Chinese to have some good business sense but it seems they are just governed by insatiable greed which just ends up hurting everyone

Pliskin's picture

I agree with you completely, but tell me this; Which countries peoples aren't driven by insatiable greed?

personal109's picture

In a world of fiat curencies and rampant money printing, anything is possible. 

roddy6667's picture

In most of China, housing is affordable. This article is reporting on specific markets in the most bubbleicious cities. This is like reporting on Park Avenue in NYC and Palo Alto in California and Vancouver in Canada and implying that it represents the median price. Another bullshit article to make China look bad. Nice try.

nailgunner44's picture

Nobody is trying to make China look bad. They have done it to themselves. Worst country on Earth by far. Doesn't help that they have too many fucking people. Please stop making excuses for them just because you married one!

roddy6667's picture

I can tell you have never spent any time there. How's it feel to be a stooge for the MSM?

Pliskin's picture

Yep, my apartment is 200 Sq M, with private access to a 30 m2 rooftop garden (Yes, we live on the top floor)  The price has been the same for the three years we've lived here 2200 RMB a mnth, we sign a years contract and pay a year up-front.  I guess it does depend where you live in China, as you so rightly stated, roddy.

Before I came to China '11, I lived in Den Hague, NL, my apartment which was half the size of this one (90M2) was 1800 Euros a month, before that I lived in Dublin, IRE, early '00 s, my 2 up 2 down terraced house in Phibsboro was 2000 Euros a month.

My best friend lives in Norway, out in the middle of no-where (Works for an oil company, but his house is certainly not a mansion or anything luxurious) he pays the equivalent of 4000 Euros a month.

Bubbles, bubbles everywhere,

which one will POP first,

I don't really care!

 

DaBears's picture

Here is a shocker, top floors in China are considered lowest in Class.

Pliskin's picture

Really?  I guess the guy on the 23rd floor that doesn't have a rooftop garden is laughing his ass of at me then?!?

What A sucker I feel now, while I'm lounging in my deckchair on the roof, smoking some Bud, drinking a nice cool Tsingtao, looking over the city, knowing my 'Staff' are running my business...Man, I feel such a jerk...Ahhh!

NEXT?

Batman11's picture

Markets have two modes of operation:

1)    Price discovery

2)    The bigger fool mode – riding bubbles for capital gains on rapidly appreciating assets

The Chinese are unaware of mode 1.

consider me gone's picture

Turning Japanese, I really think so.