Saturday, 1 November 2008

Housing Crisis in China: An overview

One reason why I believe the economy is in a much worse state than many seem to want to admit is the state of the housing and retail market. One problem is that the Chinese are yet to experience falling prices and they will not be prepared for the fallout.

Danwei have a useful summary piece with some interesting links. The interview with the original Forbes writer is interesting.

1. Forbes: Olympian Bust?

Beyond the hoopla, an increasingly bleak property market is spreading around China

The sales hall at the oasis housing development welcomes customers with multicolored streamers, water fountains and marble floors. Sales agents inform visitors that only a few units are available from the first two phases of the project and that 70 of the 130 or more buildings are almost completed. But just a few hundred feet behind the sales hall, some of the "almost completed" buildings look like neglected hulking shells, the concrete aging and exposed, the green scaffolding fabric tattered from neglect. Construction workers idled nearby. Prices have been slashed from $95 per square foot to $55. Industry insiders say that as few as 300 units have been sold out of the first 2,000 put up.

The Economist: What goes up

Numerous other property companies around China are similarly beleaguered. The Chinese press says that in September around 100 homeowners in the eastern city of Hangzhou stormed into the offices of Vanke, a big developer, to demand compensation for falling prices. In March a company in the southern city of Shenzhen (pictured above) caused a stir after it cut prices by 20%, by coughing up the difference to about 25 previous buyers of its property. Others have resisted giving cash, but have tried to calm homeowners by offering discounts on management services.

International Herald Tribune: Chinese banks brace for housing aftershock

As in the United States, Britain and Spain, the real estate bubble in China has turned into a bust in many cities; only one of the two dozen towering cranes at projects near Liu's home was in operation one recent afternoon.

Banking experts and economists expect the bust to produce, by next spring or summer, a sharp increase in loan defaults that could erode the high profits earned by Chinese banks over the past three years.


"Real estate developers are threatening the People's Bank of China, saying, 'If we die, the banks die first,"' said Yu Yongding, a former member of the central bank's monetary policy committee and now an adviser to the cabinet.

According to Yu, developers are exaggerating the dangers that bankruptcies could pose for banks. "If the government bows to this kind of pressure, we lose all the benefits of what we did before" to control inflation, Yu said.

Paradoxically, the relative lack of sophistication of the Chinese mortgage system could keep its real estate bubble from expanding into a credit and financial crisis like the one that has engulfed the West.

Wall Street Journal: China Aids Home Buyers to Curb Impact of Slump

BEIJING -- China's government is racing to make sure one of the world's biggest housing booms doesn't turn into a bust.

How the swoon in housing plays out in coming months may largely determine how severe the nation's economic slowdown during the global financial crisis will be -- and how acute the world-wide repercussions of the slump will be, as China's demand for construction materials declines.

Construction workers demolish old buildings to make way for a new property development in the center of Shanghai.

While housing bubbles around the world have burst, China's market has been seen as different because its surge in home building has been driven less by financial leverage than by real demand from a rapidly urbanizing population. Anywhere from 15 million to 20 million people move to Chinese cities each year.

But sales of new housing in China have plummeted in recent months as buyers have been spooked by a deteriorating economy and weakening prices.

Here is the interview:

China real estate market slump: Q&A with Gady Epstein [Danwei]

Has the Beijing property slump described in your article continued?
Yes. Prices are supposedly holding steady (or even going up), but the key figure to watch for is transactions. No one's buying apartments, no one's signing big leases on office space. The secondary market for apartments looks ugly as well.

Is it going to get worse?
I think it will definitely get worse in the short term. The central government has just announced measures intended to prop up the housing market, including a lower down-payment requirement, but it's obvious that the public has lost confidence in the market and is taking a wait-and-see approach. People no longer assume, as they did for much of the last five years, that buying an apartment is a can't-lose investment.

How will the global financial crisis affect the Beijing property market?
In the short run, it will have both a psychological and real impact, as people and companies delay big purchasing decisions either because they're nervous or because they're short on cash or credit.

In the long run, the world could look to China to lead the recovery, and it's possible that a year from now, people will be talking up real estate in Beijing again. I suspect we're looking at more like 18 months to two years, in part because the financial crisis will continue to play out for some time. But it's impossible to see that far ahead. Many have looked foolish in the past for betting against China, just as quite a few people looked foolish for betting only 12 months ago that the Chinese stock market would keep going up.

Is there any danger in China of slowing economic growth leading to foreclosures on a large scale?
There is a danger of this in the next year, as homeowners begin to see their home values fall below their mortgage balances. But personal savings are high in China and the mortgage market is not as wildly creative as in the U.S, so the danger, while real, is not a systemic threat along the lines of the U.S. sub-prime disaster.

Most economic analysts who watch China agree on one thing: the long run picture — five, 10 years from now — looks good for Chinese real estate. That's because of ongoing urbanization and because there are still few places for Chinese to park their money, besides banks, the stock market (!) and the art market (!!).

I tend to agree with the interviewee's answers although I would tend to be a little more pessimistic. Once burned it will take a while before trust in the housing market returns.



DOR said...

Here's what I'm hearing: Non-Chinese citizens are now restricted to owning one residence (although it isn't clear how this will be identified, let alone enforced).

Marion TD Lewis, Esq. said...

I am bullish on the Chinese housing market rebounding strongly. The great thing about their market versus ours here in the U.S. is that fundamentally it was built on real supply and demand, rather than leverage and arbitrage as was used here in the U.S. in the subprime scheme.

By Marion TD Lewis, Esq. New York

Chris said...

Well, it is true that the funding for the housing bubble in China wasn't based upon cheap money as the in US and UK - but that doesn't mean that it was based on real supply and demand.

Housing has been used as a form of investment in China partly because the stock market isn't well developed. Many apartments were bought because "prices can only go up". The owners were looking to rent out the apartments, and then sell them at a later date for more money.

However, with a glut of apartments available to rent, the rents have been falling. In north China, house owners **must** pay the winter heating bill even if the apartment is empty. No tenent means a big loss each year.

I live in Dandong for 1 year. There are new apartment buildings there that are mainly empty. This pattern is being repeated across most smaller Chinese cities.

The construction companies have over-extended, and built too many apartments. A few years ago they were selling all the apartments before they had even finished building them. There will be many incomplete buildings in China now, and many more sitting empty.

Economist said...

Thanks for the comments. I tend to agree with Chris. I think he has it spot on. The issue is what will happen to those who lose so much money.

All Roads said...


The rule you mention has actually been on the books for 18-24 months now, and it is still uncertain how it will apply.

My guess is that with housing prices off 30% in some areas of Shanghai, the government will not look to enforce this too strictly.


chandrabhan said...

I have always been curious about functionality in websites and, well, the world in general. I read this article with great interest. It does seem to me that the reason we comment is to speak our minds so why not have the comment field first? However, as others have pointed out, one gets used to the conventions regardless of reason.
IT developer

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