Monday, January 25, 2010

China 2010, Japan 1989?

"Li Nan has real estate fever. A 27-year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700-sq.ft. apartment in west Beijing. Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment. ... In the last 12 months, such apartments have doubled or tripled in price, to about $400 per square foot. 'This year they'll be even higher,' says Li. ... Some local officials are even building towns from scratch in the desert, certain that demand won't flag. And if families can swing it, they buy two apartments--one to live in, one to flip when prices jump further. ... The real estate rush in fueling fears of a bubble that could burst later in 2010, devastating homeowners, banks, developers, stock markets, and local governments. ... On Dec. 27, China Premier Wen Jiabao told news agency Xinhua that 'property prices have risen too quickly.' He pledged a crackdown on speculators. ... In some places, demand for upper middle class housing is so hot it can't be satisfied. In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. ... In Beijing's Chaoynag district--which represents a third of all residential property deals in the capital--homes now sell for an average of nearly $300 per square foot. That means a typical 1,000-sq.-ft. apartment costs about 80 times the average annual income of the city's residents. ... How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing's half-trillion-dollar stimulus plan all made funds readily available. ... Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively', my emphasis, Dexter Roberts at Businessweek, 11 January 2010, link:

"China has told banks to stop giving commissions to real-estate agents for introducing mortgage customers, as Beijing tries to rein in its property market and unscrupulous lending practices. ... The China Banking Association said Wednesday that the new guideline on housing-loan commissions has been in effect since Jan. 1. ... 'High commissions paid by banks to real-estate agents have seriously disturbed the [financial and real-estate] markets and impacted banks' credit business,' the association said. ... The practice isn't unique to China but has raised regulatory concerns, as banks often reduced lending rates or relaxed lending practices to secure individual mortgage loans, a lucrative sector to lenders, while real-estate agents helped borrowers forge mortgage documents to get higher commissions. ... Central-bank data show that banks extended 952 billion yuan ($139.45 billion) worth of individual mortgage loans in the first three quarters of 2009, nearly four times the amount issued in the same period of 2008. ... In December, prices of new housing in Shanghai rose to an average of 20,187 yuan per square meter, up 8% from November, government data show", my emphasis, Rose Yu at the WSJ, 14 January 2010:

"Fresh steps to rein in China's booming housing market--one of the engines that has put the country on the cusp of becoming the world's second-largest economy--triggered an international selloff in stocks, as investors grew concerned about the Asian giant's continued growth. ... Wag Shi, head of China's biggest property developer, China Vanke Co., said last month his country is at risk of a Japan-style property bubble if rapid price gains spread beyond major cities. ... Bank of China Ltd. will stop making new loans for the rest of the month, while several smaller banks will have to hold more funds in reserve, according to people familar with the situation. .. Loans from state banks are the cornerstone of the stimulus programs China put in place amid global slowdown more than a year ago. ... Prices of new residential property are now rising at an annualized rate of more than 20% nationwide. ... Both November and December saw a record volume of construction starts, which are up 75% from a year earlier for the quarter. Koyo Ozeki, the Tokyo-based head of Asian credit research for bond-fund manager [PIMCO], says that comparisons of China's real-estate boom with Japan's speculative bubble are overdone, in part because Japan's economy was much more mature in the 1980s than China's is today. ... Even without a crash, a housing market that serves only a narrow slice of the urban elite could turn into a political problem for the rulers in Beijing", my emphasis, Andrew Batson at the WSJ, 21 January 2010, link:

China today looks like 1989's Japan or California in 2005. From 1989 to 1999 Japanese real estate fell about 80%. Here in Houston, a 1,000 sq. ft. condominium will bring between $40,000 and $175,000 depending on the area. Compared to Beijing, Houston real estate is dirt cheap! Apartments for 80X Beijing's average annual resident income. Wow! Two apartments! Shades of Argentina years ago, when people bought two stoves or televisions not to hold Argentine pesos. "Low interest rates", hear that Zimbabwe Ben, low interest rates can cause bubbles.

Is Chinese real-estate in a bubble? You decide. Imagine, commissions paid real-estate agents could lead to conflicts of interest. Whodathunkit? I wonder if anyone at the OCC has read this? Nearly four times. Wow! 20,187 per square meter is $275 per square foot (20,187 / 6.83 = $2,956; $2,956 / 10.76 = $275). This is not cheap. You can buy new homes in Houston for $100 a square foot.

Disagreeing with Pimco, what difference does it make the Japan's 1989 economy was more mature than China's today? If cap rates in China are about 2-3%, which is what I think they are, China's real estate is overvalued. Stop here. Are China's state banks its answer to Freddie and Fannie? 20% annualized! Shades of Los Angeles 2005!


W.C. Varones said...

A hard rain's a-gonna fall.

Anonymous said...

What happens if Chinese central bankers devalue the yuan? Would this repatriot overseas Chinese who would buy Shanghai condos?

The real estate prices and practices there seem insane. Oh yeah... like California.

Independent Accountant said...

Devalue the yuan relative to what? I don't see where you're coming from.


Anonymous said...

Oh right... they have been devaluing the yuan... duhh.

W.C. Varones said...

Indeed, they're devaluing the yuan by anchoring it to the dollar!