How China Is About To Unleash A Monster Housing Bubble, In Six Easy Steps

One week ago we showed the disturbing degree to which the latest (and greatest) housing bubble among China's Tier 1 has gripped the broader public, when we reported that local speculators are waiting in line for days to flip homes

Visually, it looks as follows - the bubble is entirely in the Tier 1 cities; for now everyone has given up on the other regions which are suffering greatly as a result of the bursting of the commodity bubble and have seen an exodus of recently unemployed workers:

 

The demand for housing in Shanghai and Shenzen has gotten so "bubbly" that even the government-run news agency Xinhua on Wednesday warned of increasing leverage risks and called for further tightening measures to rein in the market. Which is ironic, because just days later the People's Congress announced it would support the Chinese housing market, sending conflicting messages of whether it does or does not want another housing bubble.

And while we know that retail speculators are simply feeder-fish piggybacking on the latest housing craze, it is the people with far more capital - and leverage - who are ultimately pulling the strings, as an article in the local media explains in detail.

In an article written on Caijing, we get to the bottom of the rapid rise in housing prices in Shenzhen and other Tier I cities. As it notes, the property boom is ominous, and ultimately hints of even more capital outflow and currency devaluation to come.

The gist of the article (in Chinese) is that the business owners, foreign factory bosses and other powerful people are the cause of the meteoric housing price rise. Here is the link. Some of the other highlights:

The typical housing transaction in this latest housing bubble looks as follows:

  1. The business owner creates a fake employment contract with his maid or driver, showing an impressive income to justify a high monthly mortgage.
  2. The owner sells his property to his maid/driver at the highest price possible (as much as the bank will appraise for). Maid/driver doesn't care about what the price is and accepts the asking
  3. The owner gives his maid the money for the down payment of 30% (lowered recently as PBOC policy), while receiving the the full or above full value of the property
  4. Maid/driver moves into the upscale property of the owner, which is why mainstream media is characterizing the boom as 'upgrade buys'. And continue to live there until the actual owners decide to stop outlaying for the mortgage payment.
  5. The owner cashes out of the property basically with PBOC's help (ease of credit, lowered down payment etc), promptly moves the money out of China through import/export channels, contributing to capital outflows.
  6. At some point in the future, the owners will stop making mortgage payment, since they've already cashed out of the property with a huge windfall. Bank goes to foreclose; maid/driver will go back to living where they lived before.

In Shenzhen, housing debt as percentage of total debt is 22.4%, 1.7X Shanghai and 2.25X Beijing.

 

But what's more worrisome is that since this trick can be applied basically anywhere in China, it will be and the elite in Shanghai and Beijing will catch on as will tier 2-4 cities, whose governments are even more desperate to rescue the housing market.

With the elite and smart money milking the existing banking system in this way and moving money out, China's 3.2 Trillion (and declining for 4 consecutive months) official reserves doesn't look all that impressive.

h/t DS