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Beijing Property to become Broken China


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I've just had a visit from my brother and his wife who is Chinese and works in RE in Beijing. There is an exponential property boom In Beijing and Shanghai with prices in most places well above the UK (but not London) average. They have never had a property boom before as they have never had enough property in private ownership to cause one.

 

I suspect a vast bubble is forming in cities like beijing and Shanghai. Do readers think the Chinese economy will remain strong enough for it not to burst catastrophically?

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Welcome, Rich G. (from SP, is it?) Anyway, good to see you here.

 

China's bubble is a funny one, because:

 

+ It is not fueled mainly by bank lending

+ Chinese people are frugal and build up enormous savings

+ There are few investment options available in China

+ Most savings eventually wind up in property

+ It is hard to get "a big crash", when massive bank credit is not involved

+ Even so, for new properties bought offplan, there's a risk of a big "walkaway" prior to completion.

 

We may be seeing that now, as this post from another thread indicates:

CHINA's Property Bubble - Losing Air

 

From today's SCMP:

 

Deals collapse as cooling measures bite

Mainland homebuyers default on purchases rather than risk falling prices

Notes:

+ Property tax to be introduced, so owners cannot "freeride" property investments

+ Bank loans much stricter since early October, and maximum LTV has been dramatically reduced

+ 1st home purchase requires 30% downpayment, up from 20%; 2nd: 50%; 3rd: 100% equity (=no loan)

+ Many buyers see potential price fall, and prefer to lose their buyers deposit (of 5-10%)

+ Centaline warned that 3,000 contracts were in danger of being cancelled in Shenzhen; 10,000 in Beigjing

+ Defaults already occuring in Shenzhen, Guangzhou, Beijing, w/ buyer sentiment turning very negative

+ Sales volume down 52% to 3388 deals in Shenzhen in October (so far), compared with September

 

Howver:

+ There are still many cash buyers

+ In some areas (like Hainan) as many as 80% are buying with no finance

+ Property tax will still hit cash buyers, but introduced only in a few cities (to start)

 

China Index (HK-2823/ A50) vs. Prop. Developer (HK-688/Ch.O'seas) ... update : 3 year-D : 5yr.-W

china.gif

 

/see: http://www.greenenergyinvestors.com/index....showtopic=11581

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From Propertytribes mainly these days, I saw your address on SP but was busy so did nothing about it until Vanessa urged me to join on Tribes.

 

So you broadly agree with my feeling that there is a bubble, which is starting to burst in places (buyers walking away from agreed deals) but its structure is very different to the UK one. It will be interesting to see how it pans out.

 

My bro also tells me the Chinese stock market is hopelessly rigged by a few insiders so most people don't trust it.

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From Propertytribes mainly these days, I saw your address on SP but was busy so did nothing about it until Vanessa urged me to join on Tribes.

 

So you broadly agree with my feeling that there is a bubble, which is starting to burst in places (buyers walking away from agreed deals) but its structure is very different to the UK one. It will be interesting to see how it pans out.

 

My bro also tells me the Chinese stock market is hopelessly rigged by a few insiders so most people don't trust it.

Yes. Basically, I do agree with that, Rich.

 

Because of the much smaller reliance on debt, the "bubble" in China property prices should play out differently from the "bubble" in UK property prices.

 

In China, if people accept low returns, and hold off long enough, their rapidly-rising incomes might catch up with high property prices.

 

In the UK, the banks are unlikely to accept below market interest rates, which they suffer a long, long wait for incomes to catch up with high property prices. So properties may get foreclosed upon, and drive prices down instead.

 

Though Beijing properties are at a higher multiple of incomes in than in London, there may be a greater risk of a bigger and more painful drop in London.

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Thanks for the explenation, very interesting. My sis-in-law tells me that rental returns are extremely low in Beijing, but people accept them as they don't necessarily have a mortgage to pay and they are counting on the capital appreciation. Bit of an assumption that (CA), but with no mortgage at least no chance of repo!

 

The rents sound scarcely enough to cover maintenance and replacements to me, but obviously labour and many other things are much cheaper there.

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I'm informed that there are mechanisms in place to hold back Chinese property prices. One is the 70-year leasehold to which all properties are subject. New private property laws would seem to give homeowners the right to renew their leas after that period is over, however it is some years until any properties are up for renewal and the government could change the law again before then. The RCP can get away with that with the stroke of a pen, and no one can prevent it. These methods are designed to increase the number of home-owners, thus creating a more harmonious society and keeping the RCP in power. However the mechanisms aren't working and prices are still shooting up.

 

Secondly, shoddy standards of design and construction and piss-poor materials means many units may be uninhabitable in 70 years anyway.

 

China's property market does have unusual features, one distorting feature being the vast number of new units built in small areas. These properties have virtually no resale value in the foreseeable future, as anyone moving to that area would inevitably buy a new one instead. These are often retirement homes or suchlike. In areas such as Wanliu the opposite applies, with a house owned by my bro now worth six times what they paid for it in 2003. The mortgage will be paid off in 2013!

 

According to my brother this means that London is very appealing for Chinese investors to stick some of their saved cash.

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Thanks for the explenation, very interesting. My sis-in-law tells me that rental returns are extremely low in Beijing, but people accept them as they don't necessarily have a mortgage to pay and they are counting on the capital appreciation...

Exactly.

And heavy bets on capital appreciation are often a sign of an approaching market top

 

...Secondly, shoddy standards of design and construction and piss-poor materials means many units may be uninhabitable in 70 years anyway.

 

China's property market does have unusual features, one distorting feature being the vast number of new units built in small areas. These properties have virtually no resale value in the foreseeable future, as anyone moving to that area would inevitably buy a new one instead.

According to my brother this means that London is very appealing for Chinese investors to stick some of their saved cash.

They have many better choices than London:

 

Hong Kong (where I live), Singapore, Malaysia... and of course, the US

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  • 4 weeks later...

I wonder do you know anything about Midas Estates (UK operation, US may be different co)? They are running marketing meetings to China apparently to sell London properties. I know you are pretty hot on the mis-selling of London by developers to foreigners. There seems remarkably little on Midas on the net, either positive or negative.

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I wonder do you know anything about Midas Estates (UK operation, US may be different co)?

Thanks for the heads up.

But I havent heard of them here in Hong Kong.

 

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Wasn't sure where to put this...

 

I get a newsletter from Stanley Gibbons who deal in rare stamps. A quote from the newsletter...

As you probably know, I have been spending a fair bit of time in China recently...

 

It is a massive market. It is a mad market. It is an obsessive market.

 

And, what the Chinese are most obsessive about now (thanks to yours truly) is the “BLACK PENNY”.

 

That's what they call it anyway. It's better known to us as the “Penny Black”, the first and most famous stamp in the world.

 

We sold them all. We then had the problem of working out what to do with all the cash.

 

As if that wasn't enough, we received an order for 10,000 penny blacks from a major trade buyer. Think about that for a second... “10,000 penny blacks”.

 

and...

 

Bear in mind, that the order for 10,000 is a first order. This could go on for much longer. We might end up with most of the penny blacks in the world going to China.

 

If you look at other markets in China, this is no surprise.

 

Take wine for example...

 

James Fletcher of Albany Portfolio Management has this to say on the subject:

 

“Notably, your average Chinese millionaire is considerably younger than his Brit counterpart; 39 and 56 respectively.

 

In fact, even your average Chinese billionaire comes in at a mere 49 years. And these young, cash rich men (for the most part) are splashing out on conspicuous, high end luxury goods like never before.

 

And in such an image conscious society, the big names in wine – Lafite, Petrus - are experiencing levels of demand that are forcing up prices at a staggering rate. Yet, it seems the more expensive these wines get, the more they want them. Bad for the consumer, GREAT for the investor.”

 

The newsletter is obviously hyping it up here, so that I buy some stamps before the Chinese have them all. That said, are wealthy Chinese trying to buy assets left, right and centre?

 

(Apologies for de-railing the thread)

 

 

 

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  • 2 weeks later...

The reason for the rise of the prices of property in China is their high liquidity. However the government is wheeling out an array of administrative measures to deter speculative buying in a sector that accounts for about a quarter of overall investment. I guess their economy will remain strong for output and new orders showed no sign of suffering from the government’s campaign to cool the property sector.

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The newsletter is obviously hyping it up here, so that I buy some stamps before the Chinese have them all. That said, are wealthy Chinese trying to buy assets left, right and centre?

(Apologies for de-railing the thread)

China is tightening now.

When it goes far enough, some of those BLACK PENNY stamp collectors are going to SELL,

and they will flood the market with supply.

 

I would be very reluctant to want to compete with such bubble buyers, since you will not have a clear perspective on when the game is over, and how it will play out thereafter

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