Two types of people

There are two types of people in China: those who believe that China is suffering from a huge (residential) real estate bubble, and those who don’t.
The people who don’t have a couple of arguments, when you ask them why so many apartment buildings in China are empty. They say the houses are sold, but have to redecorated before people can start living in them. They argue that people buy a house for their children. They say that it is a long term investment, and yes, some of it is speculation – but not more then 20 to 30%.

Moreover, they will say that a bubble starts to appear when houses are not affordable anymore, mortgages are 80, 90, 100%  or even higher and supply is higher than demand.

Fair enough. That all sounds quite logical and reasonable. But then this. We reported earlier about the potential Chinese real estate bubble. And we also wrote about one of the most stunning examples of the extremities in the Chinese real estate market: the city of Ordos, Inner Mongolia. In this city the economy boomed in the recent years due to the mining industry; Ordos is nr. 4 in the ranking of cities in GDP / capita. Nr 1 and 2? Macau and Hong Kong.

In 2004, the government started the development of a new town, Kangbashi, outside of Ordos. The New York Times writes:

Kangbashi was projected to have 300,000 residents by now. And the government claims that 28,000 people live in the new area. But during a recent visit, a reporter driving around for hours with two real estate brokers saw only a handful of residents in the housing development.

As we mentioned earlier, we’ve been to Kangbashi two years ago:

Then it’s centre was empty. But it was also partly under construction, so it had a reason. But two years later, still no one is living there.How does this work? Are the apartments still not sold? Economist Ting Lu wrote a report about Ordos and found out:

In reality, however, all homes in the new town are sold out.  A couple of days before our visit, all units in a newly finished estate were sold within just one week.  Leverage is not high there, as … many home buyers simply pay cash … Owners in Kangbashi [Ordos' new town] are so cash-rich that they really don’t bother to rent their apartments.

Maybe it is because the climate of the city is quite unattractive: the area has 200 nights per year below zero temperature, minus 20 degrees is not an exeption and construction can only take place between April and October – otherwise it’s too cold.

But on the other side of the country, the same thing happens as well:

Analysts estimate there could be as many as a dozen other Chinese cities just like Ordos, with sprawling ghost town annexes. In the southern city of Kunming, for example, a nearly 40-square-mile area called Chenggong has raised alarms because of similarly deserted roads, high-rises and government offices.

That’s true. The southern part of Kuning is indeed suffering from a lack of people. We visited the area of Chenggong last January and saw this:

If you think this is it, and that it’s now first priority to fill these buildings, officials in Kunming have even bigger plans. As we mentioned a few weeks ago:

One of the major projects at the intersection of three of the (metro)lines will include a 456-metre-high skyscraper – “the city’s future landmark in the core business district”, He said.

Local officials in Ordos are also optimistic, according to NYT:

“This is a city of the future,” Li Hong, a government official, said during a recent tour of Kangbashi. “We are going to build this into a center of politics, culture and technology. That is our dream.”

Obviously, they are not part of the group of people that beleives in a bubble. Tsinghua Univerity professor Patrick Chovanec is, however. First of all, Chovanec writes:

what is happening in Ordos — unique circumstances not withstanding — reflects some of the most consistent and worrying trends in China’s real estate boom.

The explanation is the following: Chinese investors use real estate to stash their money. They cannot easily invest it overseas, the stock market is extremely volatile and the interest rate is lower then inflation, so it is no use to put your money in your bank account. Investing in real estate is a good alternative.

Chovanec describes the specific conditions that make this into a risky business:

It’s based on a highly unstable set of unique circumstances, including (1) limited investment alternatives for Chinese savers, (2) a limited track record, since China converted to private home ownership in the early 1990s, in which investors have never really seen a sustained downturn, and (3) minimal holding costs for idle property, including the absence of any annual property tax.

But then what about all these people – 300 million or so – that will move from the countryside to the city in the coming 25 years? Chovanec is clear about this argument:

In the meantime, demand for housing as a pure investment vehicle competes with demand for housing as a human need, driving up prices for people who actually want a place to live, and skewing the development market towards the very high end, which most Chinese can’t afford.  So despite the two trends that China’s real estate bulls often point to — urbanization and rising incomes — which are quite real, there’s still a major overhang in the market.  If you took all these empty stockpiled apartments, which are being held off the market, and had to fill them with end users, the market clearing price would be far below what people think these units are worth.  That’s a bubble.

So Chovanec is clearly in the first group. There is a golden rule: if shoe shiners taxi drivers start talking about the stock market, then it is time to sell. In China, everyone talks about investing in real estate. A sign? For ‘Jay’, a subtle commenter on Chovanecs blog, it is already chrystal clear:

To those people who argue there is no real estate bubble in China, I say they don’t even have common sense or they are insane.

Chinese Investors Flock to London for Real Estate – NYTimes.com

Does China’s development have an impact on western cities? Yes, at least on who’s the landlord. This article in the New York Times shows that Chinese and Hong Kong investors are now looking at the London Real Estate market:

In some parts of London, mainland Chinese investors have already replaced those from Russia and the Middle East as the busiest real estate buyers with deep pockets, looking for trophy assets and pushing up prices, some brokers say.

The reason behind all this? Twofold, first of all, the fear of Chinese investors that the government will impose measures on the real estate market to avoid the market from overheating:

For wealthy Asians, fears that governments may impose more constraints on red-hot local property markets back home have made investments abroad more attractive.

but more in general:

The increase in transactions highlights a gradual shift in wealth to Asia, including mainland China. Free of the debt levels that still haunt Western households and governments, much of Asia began to recover rapidly from the global economic downturn last year.

Off course it is an interesting question wheater this change in landlords will also have an impact on the physical city…

Read the full article here: Chinese Investors Flock to London for Real Estate – NYTimes.com.

Chinese netizens report: 51.23% of sold housing in Shanghai is vacant – Shanghaiist

Chinese netizens report: 51.23% of sold housing in Shanghai is vacant – Shanghaiist.

Der Spiegel forsees bursting Chinese Housing Bubble

Der Spiegel predicts a new challenge for the global economy in 2012, when Hu Jintao and Wen Jiabao step down from the government. The magazine predicts that will be the moment China’s real estate bubble is likely to burst. We’ve heard the argument many times before, but Spiegel focusses on the first ones most likely to suffer from dropping housingprices: local governments in China’s cities:

China, which long seemed immune to the global crunch, now faces the threat of a homemade real estate crisis. This could spell trouble for many local governments, which in some cases have financed almost a third of their major infrastructure projects, like airports and train stations, by selling agricultural land to real estate sharks.

The article quotes Cao Jinhai from the Chinese Academy of Social Sciences in Beijing, who scetches the worst case scenario, when local governments run out of money, because they lose their single most important source of income: land sales.

In the worst case, Cao predicts, there could be a large-scale run on the banks. “Of the 4 trillion yuan in the Chinese economic stimulus package, 3 trillion are in fact coming from local governments — and they borrowed the money from the banks.”

The Go West Project plans to focus on the overproduction of real estate in China during our trip to Yinchuan in October this year.

The influence of the state on the Chinese real estate market

Increasing influence of SOE’s on Chinese real estate market (source: New York Times)

Earlier this year, we posted an article by the Global Times reported the measures the Chinese government took on the increasing influence of State Owned Enterprises (SOE’s) on the real estate market. Today, the New York Times has a front page article on the growing influence of these SOE’s. The article is chrystal clear about the negative effects the SOE’s have on the real estate market:

By driving up property prices, the state-owned companies, which are ultimately controlled by the national government, are working at cross-purposes with the central government’s effort to keep China’s real estate boom from becoming a debt-driven speculative bubble

Figures proof a potential bubble, about which we reported earlier:

A recent study published by the National Bureau of Economic Research in Cambridge, Mass., found that land prices in Beijing had jumped by about 750 percent since 2003, and that half of that gain came in the last two years. Housing prices have also skyrocketed, doubling in many cities over the last few years.

Read the full article here.

Ordos: bubble or unique condition?

Although not in the list of ‘Go West’ cities, Ordos is one of the most interesting places in China. The city, in the heart of Inner Mongolia, became rich due to the coal mining industry and, according to Merrill Lynch economist Ting Lu:

‘Its gross domestic product has grown a “staggering” 25% a year over the last eight years’, which is more than twice as fast as the national average. (..) Its per-capita GDP of $21,600 is more than twice than of Beijing’.

The Ordos Government ‘has tried to keep the coal wealth closer to home’, by developing a new city next to the existing one. As many new cities in China, the new part of Ordos, called Kangbashi, is still empty. Read the rest of this entry »

Global Times – SOEs barred from realty

Housing development in Xi’an; picture Go West Project

China is taking serious measures in their attempts to slow down the real estate market. Today, the Global Times has a frontpage article which announces that a large number of State Owned Enterprises in the real estate market will be withdrawn from the market.

More than 70 State-owned enterprises will be withdrawn from the real estate sector once their current development projects are complete, China’s State-owned Assets Supervision and Administration Com-mission said Thursday.

However, not everyone believes these measures will help:

“It doesn’t stop the remaining firms from spending hugely on land. Instead, it only leads to the concentration of capital, making them even richer,” Wang said, urging such property developers to commit to offering more affordable housing rather than cashing in.

Read the whole article here: Global Times – SOEs barred from realty.

China’s Property: Bubble, Bubble, Toil and Trouble – TIME

The news and reports about China’s real estate market are not over yet. Time Magazine has an interesting article Bill  about this market, and it tries to answer if China is facing a(n exploding) real estate bubble. A believer in the fact that there is a real estate bubble is Andy Xie:

As economist Xie points out, residential prices in China relative to per capita income are far and away the highest in the world. The housing price-to-income ratio in urban China is over 20, which means it takes the average citizen’s total wages for 20 years to buy an average dwelling. (By comparison, the highest housing affordability ratio for a U.S. city — Honolulu — is 8.2.)

Nor, among home buyers in China, is there a significant amount of debt financing. According to Patrick Chovanec, a professor at Beijing’s Tsinghua University who studies the Chinese real estate sector, only about 50% of residential purchases are made using mortgages. The other half are paid for in full at the time of acquisition. (In the U.S., by contrast, over 90% of residential housing transactions are financed with mortgages.)

For most savers, that leaves real estate or the stock market — and if an apartment is the equivalent of a bar of gold, the stock market is the equivalent of a casino. Generally speaking, the Chinese love to gamble, but they love their bars of gold more.

Real estate bubble – or not?

When travelling through China, we often see empty buildings. Or streets. Or city parts. Whenever we ask people what is happening they say ‘Don’t worry, all these apartements are already sold. People are renting them out as an investment.’ We heard that story so many times, and we thought it sounded so unconvincing that it made us ask some questions. And apparently we are not the only ones.

The New York Times is one of a lot of sources that is reporting about China’s real estate market and questioning if there is a bubble appearing, or maybe already there. The article describes a up market development at the Shanghai riverfront, and states that the effect of a Chinese real estate bubble on the worldwide economy is huge. Read the article of the NYT here: The New York Times – Breaking News, World News & Multimedia.

But there are more people writing about this subject. Patrick Chovanec, an economist and associate professor at Tsinghua University frequently reports about this subject. He did a very interesting interview with Zhang Xin, the CEO of real estate developer SOHO China, last month. In this interview mrs Zhang states the following:

Basically . . . our strategy is to sell everything we have.  The real estate business should really be looking at rental yield; build a building and then lease it out with the rent giving a decent return.  But, because of where China is with asset bubbles, people want to buy the assets regardless of whether they can be leased out or not.  People just want to hold [property], even if it is empty.

These are quite remarkeble statements, especially for a CEO of a real estate company. More indicators of a possible bubble can be found in this post of Chovanec.

China News: New Rules Seek to Ease China Property Disputes | China Digital Times (CDT)

Property disputes are happening all over China. This is not strange in a country where all land is state owned and every urban settlement is booming: real estate development within these conditions is like preparing a meal in a pressure cooker. Last week, news was that there will be possible changes in the legislation concerning property disputes. China Digital Times had this article about the pending legislation:

Disputes over forced evictions as land gets sold for redevelopment have resulted in violent protests in recent years throughout China. New rules may give homeowners more rights and help ease tensions, Reuters reports:

With China’s feverish real estate market stoking developer appetite for land, existing guidelines allowing local governments to confiscate homes and claim land have drawn demands for change, which could eventually slow demolitions.

Property disputes in a country where the government legally controls all land can lead to rowdy protests, fights with police, imprisonment and even suicide.

According to a set of State Council Legislative Affairs rules pending review through February 12, anyone losing land should be paid market value, while demolition disputes should go to court and lawsuits should settle contract violations.

Chinese facing removal have long complained that the amount of compensation offered is far below the real value of their homes. Some allege that officials collude with developers to demand land in the name of public needs, such as roads, then turn it over to commercial investors who can reap big profits.

Strong-arm tactics should also be forbidden, they say.

Read more about forced evictions and land rights via CDT.

China News: New Rules Seek to Ease China Property Disputes | China Digital Times (CDT).

China’s housing investment is preposterously large – Shanghaiist

Cary Hooper on Shanghaiist writes:

The more we hear about China’s housing market, the more outrageous it seems. China’s real estate investment grew by 75% last year: in total, 4.4 trillion yuan was spent last year, a large part of which was fueled by 9.5 trillion in new loans. If you need a physical gauge for just how much that is, chew on this: over the course of the year, China sold 937 million square meters of space, nearly twice as much as in 2008. In order to curb housing market mania, Wen Jiabao announced new curbs on lending to manage credit growth, but with the enormous contribution that housing makes to the national GDP, we’d be surprised if anything but a crash will stop people from buying new houses.

Also check the Shanghai Daily: property sales in China surge 75%

Global Times – China rolls out fresh measures for real estate market

The General Office of the State Council, China’s cabinet, Sunday issued a notice that required central governmental departments and local governments to strengthen management, stabilize market expectations and facilitate stable and sound development of the real estate market. Read further about this subject on:

Global Times – China rolls out fresh measures for real estate market.

Chinese Decision on Rates Seen as ‘Turning Point’ – NYTimes.com

HONG KONG — China’s central bank raised a key interest rate slightly Thursday for the first time in nearly five months, in what economists interpreted as the beginning of a broader move to tighten monetary policy and forestall inflation.

After breaking stride a year ago during the global economic slowdown, the Chinese economy resumed galloping growth over the summer. Government investments, real estate construction and consumer spending are all rising briskly, thanks to a surge in lending by government-controlled banks. Read the rest of this entry »

Global Times – Housing prices may rise 20-30% next year: economist

Visitors view models of apartment buildings in a real estate fair in Jinan, capital of east China’s Shandong Province, on April 5, 2008. (Xinhua/Fan Changguo)

Although the property market is not healthy enough, there is no problem for housing prices to rise another 20 to 30 percent due to the Chinese government’s moderately loose monetary policy planned for next year, an economist said Saturday.

Wang Xiaoguang, an economist from the Academy of Macroeconomic Research (AMR) of the National Development and Reform Commission said at a forum in Nanjing, Jiangsu Province.

Read the rest of this entry »

Government warns developers about land hoarding

Apparently unaffected by the global economic recession, Beijing’s real estate prices have continued to rise this year after last year’s brief slump. Amidst complaints about the house price escalation, last week a government minister openly admitted to the media that he couldn’t afford a house in the city.

Read the rest of this entry »