Real Estate Danger to China

This is something we need to watch although it is unclear what the impact will be externally.  A slowdown in China is long overdue and would allow productive consolidation. 

The problem here is that expensive real estate has served as a place to store capital in a country that lacks too many alternatives.  Thus a decline essentially sharply reduces all that stored demand.

Most likely the Chinese will succeed in expanding demand in other sectors of the economy while allowing the real estate sector to truly consolidate.  They have largely shown understanding and skill at redirecting resources and I simply do not expect that to change soon.

China Appears on Verge of Dangerous Real Estate Decline

By Lu Chen, Epoch Times | February 14, 2014

http://www.theepochtimes.com/n3/507161-china-appears-on-verge-of-dangerous-real-estate-decline/

Real estate is one of the most important sectors of the Chinese economy, and for years has one way or another driven much of the country’s economic growth. But in January, the number of houses bought and sold across China dropped precipitously compared to the same time last year.

The price at which properties were sold only dipped slightly, meaning that the industry is not in crisis, but growth in real estate prices grew at a slower pace in January than it typically does. 

Both of these trends — few transactions, and a price tending toward stagnation — are warning signs to the real estate industry in China. Experts have for years argued and speculated about whether and to what degree the Chinese real estate market was a bubble, and when it would burst or deflate. 

“Housing prices in China’s first tier cities are not likely to drop sharply soon, but they won’t increase much either,” said Jason Ma, a senior commentator on economic issues with New Tang Dynasty Television. 

The Price is Too High

Slowing sales owes to the excessive price of housing in China, Ma said. 

“Housing prices in first tier cities like Beijing and Shanghai are higher than in the United States, but the average Chinese salary is only a tenth of Americans’. The group of people who purchase real estate is shrinking.”

Sales Slow

The recent news comes from China Index Academy, which monitored the real estate markets in 43 major Chinese cities, including first tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen. (China rates cities in tiers based on their levels of development, with first tier being the most developed.)

The report shows that more than 90 percent of the monitored major cities saw declines in volume in January.

The volume of trade in Beijing, Shanghai, and Shenzhen declined by 30 percent compared to December, with some, such as Dalian and Bengu, dropping more than 50 percent.

One factor that contributed to the low trade volume is the Chinese New Year, which goes for around and week and began on Jan. 31 this year, 11 days earlier than last year. 

The volume was lower than January last year, especially in first tier cities. Beijing’s buying and selling of pre-owned houses was less than half of that last January. Guangzhou’s trade in real estate also dropped by nearly half of that last January. 

Housing prices have been increasing steadily for a long time in China, but in 2013 this trend showed signs of tapering. Prices only edged up in half of the monitored cities in January. 

The Global House Price Index prepared by Knight Frank, a major real estate consultancy, shows that mainland China’s housing prices increased the second most in the world in 2013, by 21.6 percent. Dubai increased the most.

Jason Ma, the economics commentator, said that housing purchase restrictions in 2010 restrained sales. These restrictions stipulate that only official residents of major cities can have two houses per family, and residents of other cities can only purchase one house per family.

Risk

For years, Ren Zhiqiang, one of the largest property developers in China, said he has been attempting to draw attention to the risks in China’s real estate market. He is chairman of Huayuan Property, which has a market capitalization of 4.5 billion yuan, ($740 million). 

He alerted investors to slowing house prices in a real estate award ceremony on Jan. 21 of this year. 

“I’ve raised the topic of ‘risk’ in real estate reports for the first time in over 10 years,” Ren said. “It’s a very dangerous thought that developers still believe house prices will increase like in 2013. That’s my biggest worry.”

Housing price growth has been worse in third and fourth tier cities so far this year, with a declining trade volume for the last three months.

‘Ghost Cities’ 

The slowdown in the real estate market is having a more pronounced impact on the smaller cities than many predicted.

“Real creative and big companies in China are located in top tier cities, and almost none of them are in China’s third and fourth tier cities. This leads to brain drain and population outflow in those places,” Jason Ma said. 

“So small cities can only rely on natural resources such as mining or government projects. But local governments have less and less ability now because of huge local debts.” 

This exacerbates what observers have called “ghost cities”: under-occupied cities, where vast sums of money has been spent on real estate projects that then generate insufficient income to service the enormous debts. 

“It might be too early to reach a conclusion on China’s real estate market collapse,” Jason Ma said. “But if the trade volume keeps trending low like this throughout February, it may be a signal that housing prices are in a dangerous place.”