China Property Bubble

On AFP China property sales soar, triggering bubble fears

• China property sales soar, triggering bubble fears
  (AFP) – 20 hours ago
  
  BEIJING — Property sales in China have soared by over 60 percent so far this year, the government said Monday, triggering fears of emerging asset bubbles.
  
  In the first seven months of the year, sales of all property were up 60.4 percent from the same period a year ago, while housing sales increased by 65.3 percent, the National Bureau of Statistics said in a statement on its website.
  
  "The real estate market has entered into a quite sensitive period now and bubbles have risen in some regions," Qin Rui, an analyst with house agency 5j5j in Beijing, told AFP.
  
  "In Beijing, house prices have far exceeded affordability for most residents," he said.
  
  Property prices elsewhere in China picked up further in July, official figures also showed Monday, as the effects of government stimulus efforts gained strength.
  
  Prices of real estate in 70 major cities jumped by one percent year-on-year last month, the statistics bureau said in another statement, issued with the National Development and Reform Commission.
  
  That followed a 0.2-percent rise in June. Until then the index had slumped for six months since December, as it was hit by previous government attempts to rein in prices as well as the global economic crisis.
  
  Prices of new houses increased 0.3 percent in July from a year ago, compared with a drop of 0.6 percent in June, while those of existing houses went up by three percent, up from 2.2 percent a month earlier, the statement said.
  
  Since October, the government has taken a series of measures, including tax breaks and preferential rates for first-home buyers, to avoid a crash in real estate, which accounts for more than 20 percent of urban fixed investments.
  
  In addition, inflation expectations due to a surge in new bank loans this year is also driving the sector's rebound, analysts argued.
  
  New loans for the first half of the year amounted to a record 1.1 trillion dollars, recent central bank figures showed.
  
  Qin said funds had flooded into the real estate and stock markets as companies sought to exploit easy bank lending policies for quick profits.
  
  However, he predicted the government might be forced to tighten its policy, causing a major correction.
  
  "China's real estate market ... relies heavily on capital. It will definitely be badly affected once there are changes in the supply of funding," he said.

Many thanks to China PM Wen: The True World Champion Of Money Printing!

In the posting Yet Another Warning On China From Andy Xie I highlighted on the issue of overbuilding and empty buildings, do see the following posting from Prof. Pettis: Notes on a real estate trip in China

Let me highlight the following:

• Fortunately one of the readers of this blog and a fund manger, SM, wrote me the following very interesting email (slightly edited) last week. It is not intended to be an overall picture of the Chinese real estate market but is, rather, notes generated during and after a visit through certain parts of China to gauge the investment climate. At the end of his notes he appended a few questions for me.............
  
  
  I don’t know how much you travel around China. T and I do a fair bit, and most recently we were in Guiyang. I thought I’d seen insane excess in the past – 200 thousand square meter malls completely empty next to apartment complexes with 40 thousand units and 30% occupancy rates, etc. etc. But what we saw over there is rather hard to fathom. It seems the Guiyang city mayor had the same idea as the Shenzhen mayor – to move the old downtown to a piece of undeveloped land.
  
  Of course Guiyang has a quarter the population and probably a quarter the per capita income of Shenzhen. They built sprawling new government buildings about a 20-minute drive north of town. And then the residential high rise projects started going up. From driving around the area, we figured well over 100 20+ storey buildings.
  
  What was most distressing was that the development has been totally uncoordinated – a project with 15 buildings here, in another field two miles away a project with one building, another mile in another direction three buildings, sprawled over what was easily over 30 square kms. of farmland well north of town. Every building we got close enough to see was either incomplete/under construction, or empty. Our tone gradually went from “Haha, another one!” to “Oh my God, another one.” We conservatively guesstimated that we saw US$10bn of NPLs in one afternoon. The only buildings that were occupied were six-storey towers built to accommodate the peasants who had been displaced by the construction.
  
  Back in the city proper, every neighborhood we saw was a convulsing mess of buildings being torn down, new ones being built, and unfinished high rises starting to crumble. We have a few questions we’d love to hear/read you chew on (all the hard questions of course):
  
  1. What will determine whether China experiences a steady slowdown (possibly sub-par growth rates over next decade) vs. a crash of the economy. Is controlling credit and SOEs enough to prevent a collapse of the typically most volatile component of the GDP – fixed asset investment? If they can prevent a crash, then maybe it’s all worth it? (the premise for shorting rests on the place crashing)
  
  2. How high can the debt go and for how long can they keep on rolling over dud loans, dud payables, defunct real estate projects, before it becomes truly unsustainable? Do we have any precedents to go by, what would be the clues to look for that it’s cracking? And which are the pieces of the chain that are most fragile and most difficult to control by the government? (inventory, evidence of flight capital)
  
  3. Could the Chinese create a mess of monetary and fiscal policy and create a big inflationary push or are they paranoid enough inflation to resist it? Given the poor Chinese reporting how should we track these trends?
  
  4. What’s the chance that the Chinese want to create a full blown economic bubble that they wish to ride on for like 5-10 years in hope of then miraculously diffusing it because the early excess would be taken care of by demand created by later bubble growth? All in their light “justified” by China still having a low base for most things. (do read the rest of the posting here )