Sunday, August 15, 2010

The Chinese Property Bubble

It seems, according to news sources, mainland Chinese buyers are sweeping in to grab property around the world. But nor are other areas around the world oblivious to this recent development:

1) Hong Kong: Hong Kong housing bubble! Mainland buyers blamed

2) Australia: Chinese whispers: they're driving up housing prices

3) Vancouver: Mainland Chinese buyers driving up luxury home prices

4) Los Angles: China’s new rich set trend buying luxury homes in California with cash

5)Korea: Rich Chinese buy villa in S. Korea resort to spend weekend

6)U.S.: China property buyers go global as yuan rises

7) Singapore: Chinese developers eye S'pore property

8) Japan: Japan luring Chinese property shoppers


Hat tip to unicas on Realestatetalks

22 comments:

JimTan said...

I doubt that Chinese buyers are a significant factor in Japan, Singapore or Australia.

Los Angelos is a pretty big place. Can foreign buyers affect the general market?

patriotz said...

Tsur Somerville, real-estate economist at the University of B.C.’s Sauder School of Business, said rich foreigners are not driving up the rest of the market.

“It doesn’t mean a whole hill of beans for the rest of us. Rich people are buying very expensive houses now,” and are not driving up prices for the rest of us.


Well I have to agree with Tsur this time. Foreigners may have some influence in niche markets, but they cannot move prices across the board. The boom before and slump after July is ample evidence of that.

That was clearly driven by misguided locals being driven by "buy before rates go up (which will go up anyway when you renew), and "buy before HST (which does not apply to used properties and which will end up being absorbed by sellers of new properties)".

Note that the article about Singapore is out of place, that's a Chinese developer on the supply side, not Chinese buyers on the demand side.

Chad_MPNP said...

Sorry for my naivety but why is there so much talk of a property bubble in China when those charts posted show that the market hasn't even hit it's 1998 highs?

jesse said...

@Chad_MPNP: who knows how the MSM decide to angle their stories. Nonetheless, they all seem to acknowledge Chinese residents have money to spend; whether their spending is causing property bubbles is open for debate.

milo said...
This comment has been removed by the author.
milo said...

Why is it so hard for some to follow this? Many have been in denial for the past years, with some waiving the flag of PC.

In Singapore, Minland Chinese buyers have been significant in the last 5 years, and Chinese Indonesians in the last 10-15 years.

In the case of HK, a recent article, although crudely translated, highlights the problems there.

"Mainland people carrying bags of cash to buy property in Hong Kong, this sensational story in Hong Kong are often heard, but to support the real reason the city is a debt bubble. This is nothing new. Compared to its economic growth, rising debt in Hong Kong three times the speed of the former. Indeed, the private sector leverage and even higher than in 1997. After the 1997 crash, but also in such a short period of time to pull the leverage is so high, it would be Hong Kong characteristics.

Hong Kong's financial sector completely irresponsible act fueled the bubble. Average mortgage loans linked to the Hong Kong interbank interest rates, less than 1%. As long as interest rates to 3%, many borrowers will fall into trouble. Is this the financial products than the U.S. sub-prime mortgage stronger? Hong Kong Government to tolerate such financial products? Once the bubble burst, the Hong Kong Government has also been forced to prop up property prices by restricting supply. After each round of this cycle, the Hong Kong economy will become even smaller."

http://tinyurl.com/2abzxe3

Chad_MPNP said...

Milo,

That doesn't answer my question. When one claims there is a "bubble" it is pretty darn curious that the "bubble" doesn't even push prices past their peak of 13 years ago and those are not even inflation adjusted numbers.

milo said...

Chad, I read, Hu and Wen are not the only ones calling the shots in the country. There are senior communist party members in the inner circle, who (including their families) have become extremely rich through real estate, banking, mining, petroleum and manufacturing. They are the ones who resist revaluing the RMB upward slowing down exports, raising interest rate to curb spending.

Where does one get China's "inflation adjusted numbers"?
They are known to fix their own GDP numbers that include unsold inventories in the warehouses.

Chad_MPNP said: "When one claims there is a "bubble" it is pretty darn curious that the "bubble" doesn't even push prices past their peak of 13 years ago and those are not even inflation adjusted numbers."

Stock Analysis Software Information Blog said...
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patriotz said...

why is there so much talk of a property bubble in China when those charts posted show that the market hasn't even hit it's 1998 highs?

So what if prices aren't as high as they were in 1998? If present prices are out of proportion to present rents and incomes, that's a bubble.

You'd might as well argue that there was no RE bubble in Florida in 2005 because the bubble of the 20's was bigger.

Chad_MPNP said...

Actually Patz that is a completely different argument. I am not comparing the magnitude of the rally in real estate, I'm comparing it's prices relative to past historical prices. If you want to use the Florida example then the rally that ended in 2006 was over 250% above the past all-time high's so don't even attempt to compare them. Bears always claim that we must revert to a mean because we're so high above historic averages, well, when Chinese RE hasn't made new highs for 13 years then believe me, it is not above historic averages.

alexcanuck said...

Uh, Hong Kong and mainland China are not exactly the same thing with the same history, you know?
The property bubble referred to is in China, not Hong Kong.
And pretty bubbliscious it is. On paper property buyers have a hefty downpayment, in practice it is often borrowed. Google "China empty cities" for tales, here's a good one to start: http://tinyurl.com/2dsl8hd and also check out http://tinyurl.com/6fp76p The worlds biggest shopping mall by footage, a dying BC resource town's mall by stores or customers.

patriotz said...

If you want to use the Florida example then the rally that ended in 2006 was over 250% above the past all-time high's so don't even attempt to compare them.

Real prices in Florida in the 20's were way higher than in 2006. In real terms it was the biggest bubble ever in the US.

Chad_MPNP said...

The chart posted is not in real terms which is my point, it's not even at non-inflation adjusted highs. Alex, you're right, I'd like to see similar charts for China as well as HK.

JimTan said...

I've been updating the bubble thread since July 22. In this update, we have several analysis from the Bank of Canada working paper and Scotia Bank. Not bearish at all!

http://www.realestatetalks.com/viewtopic.php?f=8&t=39180&st=0&sk=t&sd=a&start=135


This was my post of the day...

Finally, let's get a handle on supply. There are some who say that too much resources has been mis-allocated to RE in Vancouver. Right or wrong?

In the HOUSING MARKET OUTLOOK Vancouver and Abbotsford CMAs Spring 2010, Figure 3 is instructive. The 10-Year average (2001 to 2011F) for housing starts is @15k a year.

That is a rough match for the average @31k a year population growth (2001-2011F). Metro population has been growing at 1.6% per year during 2004-9 and 2% in 2009.

There is no over-building. The rental vacancy rate of only 2% during this recession is a confirmation. In fact, Rennie talks about the need for 18k a year in the immediate future!

What then is the problem? Prices have risen faster than most incomes. So affordability is an issue. But, how does the market handle the issue if prices do not fall?

A detail look at the housing statistics is very revealing. METRO VANCOUVER HOUSING DATA BOOK February 2010 Section 2.1 notes that household have increased from 609k (1991) to 817k (2006). Yet, in that same period, the number of single detached dwellings dropped from 300k (1991) to 290k (2006).

Fact is that SFH have been cannibalized to construct townhouses and apartments. So, why are some people are laughing at ETB's “shack”. Who's going to have the last laugh?

As a result, SFH now form only 35% of our housing stock (50% in 1991). This is a clear indication of a housing squeeze.

Rennie hinted at the future. It's no longer a choice between SFH and townhouse/apartment. The choice for most renters will be between small and smaller apartments. Goodbye to marble counter tops. Say hello to 600 sf apartments (two bedrooms, one bathroom).

Some people are talking about a bubble because of low affordability. The reality is that prices are not going down. The bull trend is intact. Prices may stall from time to time.

But, people will be forced to downgrade to more affordable housing. This has been going on for the last 15 years (at least). Why should it end now?

milo said...

The 1st batch of ADS tourists are here. Some tit-bits gleaned from the local press:

- a small cup of Starbucks coffee in Beijing costs RMB28 (>C$4); tourists pay C$2.1 in Vancouver.

- local small businesses compare their spending power to tourists from Europe in the ratio of 5:1

- local media present them as uninterested to speculate in Metro Vancouver's real estate, quoting suitable comments from individual tourists.

- They were driven by coaches to Shaugnessy. The SFHs here are cheaper than in Beijing. They are attracted to local lifestyle and standard of living.

sources: Mingpao, Worldjournal, BCBay

August Real Estate investors group from China visited Toronto, Calgary and Vancouver. There is no significant results as yet.

Dan Scarrow of MacDonald Realty questions the effectiveness of this business model. He states that this is purely a business strategy of Chinese Immigration Consultants.

Dan also emphasizes that he does not doubt the purchasing power of Chinese buyers. Recently he sold 10 luxurious view condos in Coal Harbour, 8 buyers are from China and they live here as immigrants.

source:
http://www.bcbay.com/life/house/newsViewer.php?nid=30366&id=38698

jesse said...

milo, basically the article is saying that there are usually very few sales as a direct results of these "tours." The people on these tours are basically scouting for future purchases but, given the complexity of money transfer/financing and the geographic distances involved, most purchase only after immigrating.

In addition, when they actually do immigrate, they end up getting more contacts in the local community and are not exclusively tied to the tour operators' contacts. The only residual business case for the tour operators is generating future leads and perhaps landing a few naive investors. While these may be worth all the expense (think timeshare), I don't see these trips as having a significant impact on aggregate local sales, even in the long term.

buff_butler said...

Id think Chad is right actually. I'd bet there would be some appreciation left in Hong Kong properties given higher CPI, lower bank rate and given price are lower than the last peak in real terms. Plus, rent vs own is very close and the tax structure encourages investment given the excess liquidity in the global markets.

Though mainland China is a totally different situation then Hong Kong - I'd be interested to hear any arguments otherwise.

milo said...

@jess - That's how the media reported it. There are other articles bearing such headlines "Chinese RE Investors' Group on a LOW KEY mission in Canada
Condos above $1M are most popular"
http://tinyurl.com/27eu539

Visitors are awed by the living conditions here and desire to emigrate here soon. Vancouverites are asking, "do you now think our real estate prices will crash?"

We all know the media can present information anyway they want. Let's not belabor on that, given recent incidents in Courteney, Richmond and Langley.

As an anecdote, PM of Singapore bought a SFH in BP in the late 80s. His relatives live in Upper Caufield/Caufield area. An ex-President's wife and brother-in-law emigrated here when he was still in Office. And so on. We all know that their oligarchy is the highest paid in the world. Not even Campbell and his friends pay hike up to 330% can match those figures.

We shall be looking at this scenario.
http://tinyurl.com/23uhon3

milo said...

This article is dated 2010-August-19
originally appeared in "Shanghai Papers"
http://tinyurl.com

"Chineses investors' unwritten rules (strategies) revealed"

Rule #1: buy in best school districts
(Fraser Institue's Report Card on Ontario, Vancouver schools)

Rule #2: Inexpensive properties don't buy, expensive buy

Rule #3: One day one whole building
Next to Olympics Oval, a luxurious highrise of 150 units, prices from $540k to over $3M
- sold are 142 units
- 20 plus units valued at <$2M sold, 90% of the buyers are from China.

Rule #4: revenue properties are the safest


If anyone wishes to read more, here are the links
http://tinyurl.com/295fyas

I'm not trying to convince nor dissuade anyone. If so many of you smart freakonomists et al have not nail down the answer through conventional wisdom and academic intelligence since 2004..., I though you would allow me to look at it through another angle.

Tony Danza said...

Milo, whatever helps you sleep at night!

vibe said...

How exactly is rule 3 a rule?