CHINA’S PROPERTY BUBBLE IS ALIVE AND WELL!
By Walter Kurtz, Sober Look
China’s “property bubble” is alive and well. Even as new home prices in Shanghai declined 5.7% last week, home sales have spiked. Property developers’ margins are certainly high enough so that they can offer discounts in order to increase volumes.
Shanghai Daily: Over the last seven days the sales of new homes, excluding government-funded affordable housing, surged 68.3 percent from the previous week to 140,400 square meters, according to a report by Shanghai Deovolente Realty Co.
A rumor has been widely circulated recently that the authorities will permit people who do not have a permanent residence but have lived in the city for three years to purchase a second property. Many non-residents went shopping.
Property Wire: China’s financial centre Shanghai has eased home purchase restrictions to allow a broader pool of buyers to purchase a second property.
The city has decided to allow residence permit holders who have lived in the city for at least three years to buy a second home, according to a source at the city’s housing regulator.
It previously limited the second home option to locals, or those born in the city or who worked for an extended period of time and were officially recognised as locals, without specifying guidelines for non locals.
But today it seems the authorities have either denied or backed away from this policy. This is quite telling, as it may indicate the central government’s concern about a renewal of the property bubble. With signs of property markets heating up again, the policy my now be shifting away from easing existing curbs on home purchases. Liquidity remains high, while investment opportunities outside of the property markets are quite limited, particularly given current inflation levels. Many who “missed the bottom” in 2008 are now looking to buy in fear of missing the “bottom” again. Even the Beijing market is picking up.
China Daily: According to industry watchers, the property market has been warming up. Property sales in Beijing and Shanghai, for instance, both rebounded last week.In Beijing, 2,186 new and second-hand apartments were sold last week, up 30.2 percent week-on-week, according to the municipal government.
Unbelieveable, yet another bubble that gets quickly reflated, just after its first signs of popping…Extend and pretend is getting better by the day!
Who once said: if we only need to print money to create wealth, we would all be rich by now.
I guess it was Milton Friedman and looks like China is proving him wrong!
Just take a bunch of Chinese farmers, put them some suits on and give them a fat government loan and you just raised GDP by 10%. Repeat the operation until no farmers are left. The only guys who really make money in all this are the real estate agents. Somehow that sounds familiar… damn those chinese guys really copy everything we westerners do!
I get so tired of people warning about bubbles. The stock market can only go straight up and central bankers can solve any problem and make markets surge without any long-term consequences.
When are you all going to join the blindly chorus?
The Chinese worker wants to save money for his old age. Basically, he wants to use some of his current income at a future date.
This is an age old situation. Historically what a man did was he either a) bought farmland and when he was too old to work the farm, it could still produce income or rents for him, or b) he had many children and they provided for him.
In today’s society, and obviously in China, the second option is no longer possible. We don’t have enough children. And as we have become urbanized, the second option is no longer possible. Most of us are wage workers.
One possible solution is to invest in company stocks instead of farmland as a way of producing future income. However, many investors are afraid to do this, especially as they regard the markets as a fixed game or a roulette wheel.
Another solution is for government to insure your retirement. However, most people under 40 do no believe government will be able to do this, and when you look at the demographic tables and look closely at spending projections, you cannot blame them. We’re not going to have enough taxpayers to support seniors through 30 years of retirement.
The Chinese have decide to buy property; however, the danger in this is that they are buying a non-productive asset — vacant houses, empty office space, etc.
A few people used to buy hard, portable assets — jewelry — and then sell off their diamonds in old age. I see people doing this today with gold coins or physical gold, especially as they can avoid the tax man.
How do we best take today’s assets and move them forward in time?
I think some form of private insurance might be the best answer. For example, I guy an insurance company $10,000 today, and you agree in 30 years to provide me the equivalent in today’s dollars of $25,000. Let’s say I could do $5,000 per year which would buy me six months of retirement income later.
Analysis above is extremely simplistic and short on data to say the least. Anyone who has done any serious studying on the china property bubble is aware of the complexities and the fact the imbalances cannot be wiped out by simple policy fine-tuning
Such as expanding the base o people eligible to enter the slaughter house. People aren’t that naive.
The chinese property “bubble” is not a U.S. type of bubble. The math is entirely different.
Real inflation averages 10% for the last 30 years in China. Rental cost increased 10% annually for the last 15 years. During the same period, bank saving rate averages 5% and stock return is less than 5%(the index risen much more because they kept changing the index and there was no index fund 15 years ago).
Use the same number above, 20 years from now rental cost will be near 7 times of today’s cost. China has no property tax and property maintenance cost is low due to low cost labor. Assuming a reasonable real rental yield (5% after deducting tax and maintenance fee), property price will be more than double of today’s price. That’s 5% appreciation annually. Plus the rental income, this is better than the bank saving rate.
The real risk from economic point of view is that China enters a low inflation type of environment like U.S. does now. Given the history of chinese government always papering over bad loans and always prefer a negative interest rate, no logical thinking can support a low inflation bet.
Today’s situation is that the central government wants to push the price down. They distorted the market by taking away people’s right to buy.
Comparing the chinese property market with U.S. is totally non-sense, because U.S. history never supported an outlook of long term negative interest rate. In China, positive interest rate never happened in 30 years.
Back to the “ghost city” talk, for the last 10 years, china has constructed total of 10 billion square meter. At the same time, 200 million chinese peasants moved to live in Cities. The average living space for all urban residents increased from 20 square meter per person to 30 square meter. Considering the speed of other living improvement (such as cars), this number is nowhere near insane. It is actually perfectly reasonable. The reason there are “ghost cities” is that all cities built at the same rate, but population growth was not the same for all places. For every ghost city you can find in China, you can find at least twice the size of that “ghost city” that is insanely crowed. Using “ghost city” as a mirror of what’s really going on in China is simply wrong.
China is a mess now, not because there’s a property bubble. There’s no property bubble. Investors have done their math. With 300 million more peasants to enter the city and a negative long term interest rate, buying a property is the right move. The trouble of all in China is the negative interest rate and no body knows if the chinese government will ever change it.
If China changes their interest rate policy, property will suffer. If China does not do that, property will do just fine. Foreigners who invested in China will suffer. They will face a risk of not able to get their money exchanged back when the bubble explodes.
The ghost cities are still a misallocation of resources, even if they are a small problem in relative terms. I’m sure the PBOC can paper it over, though, and some of the empty cities can no doubt be converted into prisons or military bases. The real problem is energy. China now consumes more of the world’s energy than the US. Unless China does some real serious innovation to create new energy resources, China is going to hit a hard wall within a decade. Remember, a 10% growth rate implies a doubling every 7.2 years (famous rule of 72). Can you see any realistic way China can consume 40% of the world’s energy? 50%? I can’t see it unless they can find a way to grow the pie.
The Chinese rulers understand MMT very well. Full employment will be maintained, and the Government owned banking sector will be manipulated to prevent any real crashes from taking place. China will keep on growing until they run out of resources, mostly imported energy. As long as there is coal to be mined in the US and oil to be pumped in the Mideast and shipped to China, growth continues.
Can China consume twice their current levels of energy? A 10% real growth rate implies this very thing in 7 years. I doubt this can happen.
Nobody knows what will happen in China,Even the policy makers,the economic experts,the property mogul and the government are doing guess work.The China phenomena is such that no history have experienced before.
The only thing im sure is that,Its natural to grow,stop growing and die.
China has experienced the fastest growth in modern history,China is slowing down in growth and China will stop growing soon.For the fact that the government is controlling a lot of sectors and making policies that are unfavorable to open market and direct competition,It will always look good till its too much for them to handle.Hope it does not turn into chaos and the biggest social unrest in the history of mankind.