China Property Bubble Or No: 64.5 Million Vacant Houses In China!

I had highlighted several postings on the China Property Market before.

• Aug 11 2009: China Property Bubble
• Oct 16 2009: Another View On China's Real Estate
• Nov 19 2009: China's Empty City! (must watch clip :P )
• Jan 1 2010: China Property Bubble Or No?

On today's South China Morning Post, 64.5 million mainland houses lying vacant: economist

Holy cow! 64.5 million mainland houses lying vacant????

• 64.5 million mainland houses lying vacant: economist
  Mainland’s property market remains dangerously overheated and failing to tame the speculative bubble could threaten financial and social stability, a prominent economist said in an official newspaper on Friday.
  
  Yi Xianrong, an economist at the Chinese Academy of Social Sciences, a government think tank in Beijing, noted estimates from electricity meter readings that there are about 64.5 million empty apartments and houses in urban areas of the country, many of them bought up by people wagering on a constantly rising property market.
  
  In the overseas edition of the People’s Daily, Yi said the ”shocking” level of empty housing showed the dangers brought by the country’s property boom, which the central government has been trying to cool.
  
  “If this outsized property bubble does not burst, it will hurt residents’ well-being, and also affect national financial security and co-ordinated national economic development,” wrote Yi.
  
  He wrote that the overheated property market was creating ”misallocation of resources, price distortions, squandering of wealth … and is magnifying national financial risks, so that the economic structure cannot be adjusted, ultimately leading to overall social instability.”
  
  The People’s Daily’s overseas edition is a small-circulation offshoot that tends to be more forthright than the main, domestic edition. While the paper is not an unerring mirror of official policy, Yi’s commentary suggests that the real estate market remains a worry for policy-makers.
  
  Beijing announced a slew of measures in past months to cool the property market, including raising down-payments and mortgage rates, and that has already caused deal volumes to drop and property inflation to slow in many cities.
  
  Nationwide, property prices rose 0.2 per cent in May from a month earlier, and were 12.4 per cent higher than a year earlier. The increases were smaller than in April.
  
  Property prices will fall within a few months as government steps to cool the real estate market bite deeper, Xu Shaoshi, the minister of land and resources, said on Sunday.
  
  Yi suggested that more robust steps are needed to beat back property price rises fuelled by speculation.
  
  “The problem now is that investment in the domestic property market has completely overturned China’s traditional concepts of wealth management and investment and its price formation system,” he wrote.
  

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China Property Bubble Or No?

On Business Times:

• China property bubble may lead to US-style slump
  
  Published: 2010/01/01
  
  BEIJING: Li Nan has real estate fever. A 27-year-old steel trader at China Minmetals, a state-owned commodities company, Li lives with his parents in a cramped 700 sq ft apartment in west Beijing.
  
  Li originally planned to buy his own place when he got married, but after watching Beijing real estate prices soar, he has been spending all his free time searching for an apartment.
  
  If he finds the right place - preferably a two-bedroom in the historic Dongcheng quarter, near the city centre - he hopes to buy immediately. Act now, he figures, or live with Mom and Dad forever. In the last 12 months such apartments have doubled or tripled in price, to about US$400 (US$1 = RM3.42) per sq ft.
  
  "This year they'll be even higher," says Li in the January 11 issue of Bloomberg BusinessWeek.
  
  Millions of Chinese are pursuing property with a zeal once typical of house-happy Americans. Some Chinese are plunking down wads of cash for homes. Others are taking out mortgages at record levels. Developers are snapping up land for luxury high-rises and villas, and the banks are eagerly funding them. Some local officials are even building towns from scratch in the desert, certain that demand won't flag.
  
  And if families can swing it, they buy two apartments: one to live in, one to flip when prices jump further.
  
  And jump they have. In Shanghai, prices for high-end real estate were up 54 per cent through September, to US$500 per sq ft. In November alone, housing prices in 70 major cities rose 5.7 per cent, while housing starts nationwide rose a staggering 194 per cent.
  
  The real estate rush is fuelling fears of a bubble that could burst la-ter in the year, devastating home-owners, banks, developers, stock markets, and local governments.
  
  On Sunday, China Premier Wen Jiabao told news agency Xinhua that "property prices have risen too quickly". He pledged a crackdown on speculators.
  
  Although parallels with other bubble markets, the China bubble is not quite so easy to understand. In some places, demand for upper middle class housing is so hot it can't be satisfied.
  
  In others, speculators keep driving up prices for land, luxury apartments, and villas even though local rents are actually dropping because tenants are scarce. What's clear is that the bubble is inflating at the rich end, while little low-cost housing gets built for middle and low-income Chinese.
  
  In Beijing's Chaoyang district, which represents a third of all residential property deals in the capital, homes now sell for an average of almost US$300 per sq ft. That means a typical 1,000-sq-ft apartment costs about 80 times the average annual income of the city's residents.
  
  Koyo Ozeki, an analyst at US investment manager Pimco, estimates that only 10 per cent of residential sales in China are for the mass market. Developers find the margins in high-end housing much fatter than returns from building ordinary homes.
  
  How did this bubble get going? Low interest rates, official encouragement of bank lending, and then Beijing's half-trillion-dollar stimulus plan all made funds readily available. City and provincial governments have been gladly cooperating with developers: Economists estimate that half of all local government revenue comes from selling state-owned land.
  
  Chinese consumers, fearing inflation will return and outstrip the tiny interest they earn on their savings, have pursued property ever more aggressively. Companies in the chemical, steel, textile, and shoe industries have started up property divisions too: The chance of a quick return is much higher than in their primary business.
  
  Newly wealthy towns are playing the game with a vengeance.
  
  Ordos is a city of 1.3 million in China's Inner Mongolia region. It has gotten rich from the discovery of a big coal seam nearby.
  
  An emerging generation of tycoons, developers, and local officials will go to any length to invent a modern Ordos. So 6.5km from the old town, a new civic centre is emerging from the desert that could easily pass for the capital of a midsize country.
  
  Nearby loom a fortress-like opera house and a slate-gray, modernist public library. Thousands of villas and apartment towers stretch into the distance, all built by local developers in the hope that Ordos' recently prosperous will buy the places to be near the new centre of power.
  
  The central government now faces two dangers. One is the anger of ordinary Chinese. In a recent survey by the People's Bank of China, two-thirds of respondents said real estate prices were too high.
  
  The debate has become even more charged following injuries and deaths related to real estate. A woman from Chengdu committed suicide by torching herself when her former husband's three-storey factory and attached living space were demolished to make way for a new road. A man in Beijing suffered severe burns in a similar protest over his home.
  
  The second danger is that Beijing will try, and fail, to let the air out of the bubble. Pulling off a soft landing means slowly calming the markets, stabilising prices, and building more affordable housing.
  
  To discourage speculation, the State Council, China's Cabinet, is extending, from two years to five, the period during which a tax is levied on the resale of apartments. Tighter rules on mortgages may follow. Beijing also plans to build apartments for 15 million poor families. - Bloomberg

Back on Aug 2009, the following was posted: China Property Bubble

Here's a video on Youtube saying NO bubble: Riedel Sees No Sign of Real-Estate Bubble in China

Sorry the viedo's embedding has been disabled by request.

But if there is no bubble, what about the entire city THAT SITS EMPTY in China? Here's a video clip.

See also China's Empty City!

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China's Empty City!

Highlighted by T&T::

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Another View On China's Real Estate

Here is another view on China's real estate.

Highlighted by John Mauldin in his out-of-the-box posting. The China Files (Special Project): Real Estate. (ps as mentioned by John "Today's analysis comes courtesy my friends at STRATFOR, a global intelligence company. They've got a free newsletter as well, for which I encourage you to sign up by clicking here )

• .... The Recovery Bubble
  
  Following a temporary drop toward the end of 2007, land prices rose steadily, then began surging again with Beijing's stimulus package and a flood of easy credit in 2009. With much of this money flowing into the real estate sector, major beneficiaries included large state-owned enterprises (SOEs) involved in speculative real estate and housing investment, contributing to the inflating bubble. Among the 10 highest-priced land purchases in major cities in the first half of 2009, 60 percent went to SOEs.
  
  Paradoxically, as the global financial crisis continues, China sees little choice but to loosen its monetary policy even further, fearing the opposite would curtail economic growth and result in massive unemployment, which could lead to social instability. Beijing knows that one of the country's underlying economic problems continues to be an overheated real estate market, but it also knows that the real long-term solution - limiting the flow of cash and credit - could have dire socio-economic ramifications. Meanwhile, real estate developers, government officials and investors continue to speculate on real estate, raising land and housing prices.
  
  As housing prices continue to rise, a parallel trend is manifesting itself - rising vacancy rates in urban areas. A 2009 report by the Shanghai Yiju Real Estate Research Institute revealed that, by the end of 2008, the average vacancy rate for "commodity housing" (as opposed to welfare housing) in Beijing was 16.64 percent, and vacancies reached as high as 30 percent in some districts. Most of these vacant houses, however, are not unsold ones. They have been purchased by investors as speculative investments. While there are fewer and fewer ordinary people who can afford to buy houses, there is still excessive demand for investment housing - pressure that continues to drive up the prices.
  
  This closed loop in the Chinese real estate market is facilitated by the country's political and bureaucratic system. In China, all land is initially owned by the state, and local governments have the sole authority to sell it. And income from property taxes and land sales are a primary source of revenue for local jurisdictions. According to estimates by the State Council's Development and Research Center, tax revenue from the land in some jurisdictions accounts for 40 percent of the local budget. Moreover, net income from land sales accounts for more than 60 percent of the local governments' extra-budgetary revenue. The soft budget and lack of accountability to the people reinforces the local governments' incentive to expand their real estate investments without much concern for cost or impact on public services.
  
  Economic performance also is the prime prerequisite for bureaucratic advancement, which gives local officials the incentive to generate as much revenue as possible through land auctions. And this generally involves a level of collusion - and corruption - among government officials, real estate developers and investors.
  
  One typical strategy is for a developer to buy a big chunk of urban land from the local government but leave the land undeveloped, or build on only a small portion of it, thereby keeping the housing supply limited. Despite various state policies to lower land prices in order to make homes more affordable, local government officials and real estate developers control the land auctions. When a lower sale price is dictated from above, it is easy enough for the local sponsors to officially deem the auction a failure. Even when the developer does build houses on the property, a speculative investor, working hand in hand with the developer and government officials, can bribe both parties to ensure that he can buy all the houses at a low volume price and keep them off the market, thereby maintaining a limited supply and high prices.
  
  Another factor that enters the equation is a cultural one. The Chinese people generally prefer to buy new houses, as opposed to renting homes or buying secondary houses in which people have already lived. Indeed, in urban areas, marriage proposals often include a promise to buy a new commodity house. As a result, the secondary housing market remains very small in comparison (due also to fewer available bank loans for lived-in houses and the complicated process involved in transferring ownership).
  
  All of these factors contribute to the burgeoning real estate bubble - and make it difficult to predict when that bubble will burst. With 70 percent of real estate investment in China coming from bank loans, a dramatic drop in land values could send shock waves throughout the economy. There are already signs of decline. In Shenzhen, one of China's first-tier cities, real estate prices have been dropping for the past two years (30 percent for housing), and many developers and speculators have suffered great losses. The threat looms in other large cities such as Beijing and Shanghai and may be emerging in many second-tier cities as well.
  
  Given the current global economy and the economic balancing act it must maintain domestically, Beijing has few good choices. It must keep enough cash flowing to maintain economic growth and social stability in the short term while tightening credit to avoid a tsunami of bad loans and a market collapse over the long term. Certainly, Beijing does not want to face the kind of collapse in the housing market that Japan experienced in the 1990s, which triggered a financial crisis and more than a decade of economic malaise.
  
  But in China's real estate, as in most sectors of this vast and complex land, implementing and enforcing prudent regulation has never been an easy task
  
  

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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 )

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