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China's Real Estate Bubble Finally Cracking?


Parsad
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Fairfax had their concerns about China's housing bubble a few years ago, which seems to have fallen by the wayside as the world was worried about Covid, but is China's housing bubble finally cracking?  They've long played the hide the battered developer game, but are some of the developers just too big to hide.  Cheers!
 

https://finance.yahoo.com/news/china-property-market-runs-steam-143429278.html

 

https://www.barrons.com/articles/why-china-could-seek-controlled-detonation-for-troubled-developer-evergrande-51631577210?siteid=yhoof2

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Remember seeing so many articles on "ghost cities" years ago and how China RE was going to bust.

 

https://www.bloomberg.com/news/features/2021-09-01/chinese-ghost-cities-2021-binhai-zhengdong-new-districts-fill-up

 

China’s Ghost Cities Are Finally Stirring to Life After Years of Empty Streets

Vast new urban districts that stood vacant are gaining residents and businesses.

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New here, just sharing my two cents…

 

Don’t think the housing price bubble will burst, as too much household savings is in housing (heck in some areas there are lower prices limits issue by the government).  These mortgages are owned by State Owned Banks which are the biggest players. If they won’t lend the entire system will come to a halt.

 

Been in China for about a decade now and the government will restrict housing prices when it grows too fast (doesn’t bold well for the young adults as they housing prices already exceed income levels), but when the economy gets a little soft, they will remove the restrictions and prices will move up again.     Young adults will borrow, ask mom and dad to pitch in, etc. to put that downpayment, it amazes me the must owned and stay mentality that people have. 
 

Currently, the property market has come to a screeching halt,  the lenders no longer have quotas to lend driving up the down payment. Moreover, with whatever quota they have left, the property must be assess by multiple departments and in Shanghai you can only mortgage the property based on the lowest assessment (which for some properties that was built in the 90s are assessed at around 50/60% of market value).  Lastly, for the seller, it now takes 6 months to have the funds release to you. Which for a majority of households is a deal breaker. 

From what I have gathered, the current situation is dire for developers as consumers are unable to obtain the necessary financing. So companies like Evangrande, with high debt and servicing they are likely in a dire position (the sale of their HQ, the sale of their subsidiaries, are likely to be more of a fire sale, unless a white knight come to the rescue) as sales of whatever they have is likely slowing down as well.

 

 

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I heard an interesting theory on a podcast that the fallout from the Evergrande debacle was already manifesting itself in the various crackdowns on other sectors.  eg tech, education etc. There is an inevitability that the CCP will need to bail this dog out.  The crackdowns in other sectors are to mask the associated moral hazard.   

 

I am also somewhat surprised that commodity currencies are holding up as well as they are between developers going bust and crackdowns on steel production, it is looking like a perfect storm.  I guess the market is implying that they have a public hanging or two and then its back to business as usual

 

Iron ore price hits 10-month low as China accelerates steel cuts (afr.com)

 

The broker subsequently cut its 2021 steel production growth forecast from 6.5 per cent to 4 per cent and lowered its demand growth estimate from 2.8 per cent to 0.8 per cent.

“Current negative sentiment towards Chinese steel production and iron ore prices is likely to continue short-term given weakness in economic data,” Mr Fagan said.

JPMorgan lowered its 2021 iron ore price forecast from $US181 a tonne to $US165 a tonne and its 2022 projection from $US150 a tonne to $US125 a tonne.

“A fourth-quarter 2021 pick up in infrastructure activity should help arrest the decline in prices, particularly if tight steel conditions improve,” Mr Fagan said.

 

image.png.ff287d086d1d334907718a14cd11ce63.png

Edited by nwoodman
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https://www.bloomberg.com/opinion/articles/2021-09-08/it-s-a-lehman-moment-not-volcker-that-china-should-fear-in-its-real-estate-boom

https://www.wsj.com/articles/what-if-chinas-property-crackdown-goes-overboard-too-11631017035

 

A crackdown on runaway housing prices jibes with other recent initiatives like President Xi Jinping’s populist call for “common prosperity.” Unaffordable homes are a major cause of inequality and an obstacle to child-rearing. A huge amount of capital has also been channeled into housing that could be put to more productive uses. Previous research has linked China’s housing boom to falling productivity. The problem, of course, is that property is already so entwined with China’s economy that a sudden stop could be extraordinarily dangerous. Real estate is the biggest asset of Chinese households—who recognize that the political sensitivity of the market, and its outsize economic footprint, make sustained price falls risky for Beijing. A lack of investment options and the preference of banks for mortgage loans has exacerbated that concentration. The wealth impact from a housing crash could seriously affect already-weak consumption.

 

 

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25 minutes ago, nwoodman said:

I guess the market is implying that they have a public hanging or two and then its back to business

 

It will be interesting to watch, how this plays out. Also it is really strange how (including all crackdowns) much anticyclical policy they run at this point in time, especially comparing to the rest of the world: 

 

https://www.bloomberg.com/news/articles/2021-09-09/china-could-be-heading-for-first-balanced-budget-since-1985

Edited by UK
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34 minutes ago, bizaro86 said:

If you wanted to lower housing prices for affordability reasons, wouldn't encouraging more residential development (aka supply) be the best way to do that?

 

Perhaps true, but as I understand, especially at this point in time, due to all this Huawei situation, they just happen to want things like advanced chips even more:)

 

From some interview: 

 

"So tell me about Alibaba and Tencent. I think that this is a point that you’ve made as well, that Americans tend to focus on the consumer-facing companies both domestically and abroad, and that’s not necessarily the Chinese point of view. What’s your take on these companies we’ve heard of, the issues they’ve had, and how that relates to the private sector as a whole? DW: Well, I think one of the things is that the US has a defined stack. First of all, centered in Silicon Valley, which has now become bifurcated between the consumer internet in San Francisco and then the actual Silicon producers closer down in San Jose and in a normal year, I’m in California quite a bit, and I just find it remarkable that these two worlds almost never talk to each other, they’re just on completely different wavelengths. And right now today, when we think of US tech, we’re still thinking of Amazon, Facebook, Google, Microsoft and Apple. And I think that this has become a very clever marketing trick from California, which I rue. I do not think that Facebook and Tencent are the truest signs that we live in a technologically accelerating civilization. Tencent to me is mostly a video game company, Alibaba is making my life as someone living in urban China very, very convenient, but this to me does not represent the very apex of technology, and I would say the same of Facebook and Google as well. These are companies that are not creating a huge amount of IP. They’re very good at business model innovation as well as exploiting network effects but my heart is with the Industrial Silicon Valley. I’m in favor of the silicon! One of the interesting things is that, I think the Chinese government is actually moving towards this rejection of what I think are the most prestigious sectors in the US — tech, finance and real estate. And China has in my view over the last year, President Xi has really rejected each of these things. He is cracking down on finance, he is cracking down on real estate, and he is also now cracking down on tech. I think what we see now is very consistent rhetoric from the Communist Party that we cannot de-industrialize, we need to keep doing very well on manufacturing and this is consistently what the General Secretary of the Communist Party, Xi Jinping, has been saying. So you can see how this is manifesting in this antitrust crackdown that’s currently ongoing against Alibaba, also to some degree on Tencent. And I think what the party has recognized is that these are not the technology leaders that are going to drive forward our technologically accelerating civilization and we don’t need to fall for American marketing here."

Edited by UK
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3 hours ago, bizaro86 said:

If you wanted to lower housing prices for affordability reasons, wouldn't encouraging more residential development (aka supply) be the best way to do that?

They have been for years.  If the credit spigot is open, then speculation takes hold and you end up in the bizarre situation of the last decade or so.  The apartment is to build wealth not for living in.  Ghost cities!
 

This works wonders for GDP, jobs, wealth effect etc as long as you can keep credit growing then all good.
 

 I know, I know, the whole debt deflation thing is so 2010….

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RE Ghost cities, yes, I remember it was quite a noise around those, but like fareastwarriors posted (this was interesting, thanks), seems that ghost cities are also worked out:

 

"It took a while for people to show up. A 2013 news report by 60 Minutes described the place as a ghost town: “new towers with no residents, desolate condos, and vacant subdivisions uninhabited for miles and miles and miles.” But today, Zhengdong New District is bustling with life. Waiters eagerly wave passersby into their restaurants, food delivery workers weave in and out of crowds, and professionals congregate outside office buildings for cigarette breaks. On summer evenings, families sit beside a human-made lake to watch light shows on “Big Corn Tower” or Greenland Plaza, which houses the city’s JW Marriott hotel. The area was spared most of the damage from July’s heavy flooding in Zhengzhou, which killed almost 300 people. About half of the world’s iPhones are manufactured at the 11‑year-old Zhengzhou factory of Hon Hai Precision Industry Co., better known as Foxconn. Favorable government policies for businesses also attracted large pharmaceutical and auto plants to the region, and Zhengdong New District’s economy grew at an annualized rate of 25% in the five years through 2015, according to the most recent data. The population of the district grew 27.5% from 2019 to 2020, and property prices there are up tenfold over the past decade."

 

“It takes time for a city to develop, and Kangbashi’s situation has improved gradually,” says Sun Bindong, an urban planning professor at East China Normal University in Shanghai, who advised the Ordos City government on urban planning and development in 2007 and 2008. City leaders in China rarely occupy their posts for more than five years, so the bureaucrat who initiates construction is usually no longer in charge when the time comes to turn buildings, roads, and rail lines into a fully functional city. Local Communist Party Secretary Xing Zheng has been in charge of Kangbashi for only a few months. Over beers at a local karaoke bar, the University of Oxford- and London School of Economics-educated lawyer says that the original plans were overly ambitious but that the area offers “a lot of potential” for sectors including education, tourism, health care, and digital industries. “The plans for the city were ahead of their time, but now you can see they were right,” he says. “In the future, Kangbashi will be small but fine.”

Edited by UK
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I've been closely following the Evergrand debacle since last year. I don't think it is a Lehman moment. Yes it will likely announce a restructuring soon, but the big difference is that the Chinese government is already starting to help with the restructure, unlikely Lehman which the Fed did not bail out and that caused a massive financial crisis.

Edited by muscleman
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7 hours ago, nwoodman said:

They have been for years.  If the credit spigot is open, then speculation takes hold and you end up in the bizarre situation of the last decade or so.  The apartment is to build wealth not for living in.  Ghost cities!
 

This works wonders for GDP, jobs, wealth effect etc as long as you can keep credit growing then all good.
 

 I know, I know, the whole debt deflation thing is so 2010….

I guess I don't understand how you can have ghost cities with buildings full of empty apartments and also have rising residential real estate prices that are pushing people out of the market.

 

Are developers just building where nobody wants to live? Why would they do that?

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8 hours ago, bizaro86 said:

I guess I don't understand how you can have ghost cities with buildings full of empty apartments and also have rising residential real estate prices that are pushing people out of the market.

 

Are developers just building where nobody wants to live? Why would they do that?

I spent quite a bit of time around Shanghai and Suzhou a couple of years ago and while I didn't see ghost cities, you could see many completed towers that were only 5-10% occupied (my estimate when looking at them at night when lights were supposedly on). I asked chinese colleagues about this and while i can't quite make sense of this one answer was:

People buy these for their kids etc and they don't rent them out, because they lose value, when rented out. these apartments are sometimes still raw (completely unfurnished, concrete walls and without fixtures). Sometimes they are bought for investment purposes, sometimes for their kids.

So what can happen is that there is  shortage of housing and families live crammed with grandpa and grandma and kids in 60 sqm apartments, while there are plenty of empty apartments around that won't get rented out by the owners.

 

It makes no sense to me, but that is how it seemed to be. By the way, those towers were build to a large extend by HK developers (Hutchison etc.) and I think those guys don't build unless they sell. But again, this is just one GwaiLo's n=handful observation sample size from a couple of years ago.

Edited by Spekulatius
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China's an authoritarian country, has central planning, has a central party that controls many things...  but there are also 23 provincial govts, various municipal govts, etc.  They all have had incentives to do things sometimes at odds with the central govt.  Local and municipal govts had taxation authority removed from them back in the 1990s and so the primary means for them to raise revenues was through land sales to developers.  Local and municipal govts also created off the books special financing vehicles that raised capital to buy up land and also sometimes to lend to developers.  The financing vehicles and developers all raised capital and issue debt to WMP (wealth management products) which were sold by insurance companies to private investors and average citizens looking to earn a better return than in a bank savings account.

 

Lastly, China's hukou system which basically restricts rural migrants from owning property and living "legally" in cities is a mess.  Loopholes to the hukou system often apply to semi-autonomous regions like Inner Mongolia etc (Ordos ghost city) which is why developers and local govts collaborate to build huge apartments there, hoping that rural migrants would pick up and leave their "illegal" life in a big eastern city and move out to Inner Mongolia or some other out of the way place.

 

 

Edited by rogermunibond
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7 hours ago, bizaro86 said:

I guess I don't understand how you can have ghost cities with buildings full of empty apartments and also have rising residential real estate prices that are pushing people out of the market.

Yep it is a head scratcher.  As Spek alluded to, many were bought as “investments’ where the prevailing sentiment was you don’t put tenants in them as they will depreciate.  Kind of like collectibles are worth more if they are still in their original packaging.  

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Having visited Shenzhen/Guangzhou and Shanghai often for work, I also want to give credence to @Spekulatius point. Literally everyone wants to be a property owner, so much so that they often take loans from their employers to put down down-payments for buildings which have just been approved but the ground hasnt been dug yet. A lot of this comes from the fact that over the past 15-20 years, a ton of wealth in the middle class has been created by the rapid increase in the price of their homes, so people see this as a way of getting on in life. Another part of this is that the credit system in China is only recently being liberalized, so using a mortgage was one of the easiest ways for people to borrow money. Anecdotally, I dont remember many people having credit cards and when I was looking into $V and $MA I found that the penetration is less than 50% last year (43% in 2019). I dont recall any large free buildings in my visits but I do know that at various points in the past decade, the rental income was not covering the mortgage payments, so without price appreciation you were pretty much stuffed. 

 

As far as the Evergrande unravelling is concerned, I think this provides a much needed opportunity for the CCP and Xi to step in and clean up a lot of the debt that has been run up by developers. I am sure investors and bondholders will be left out in the cold, but following on from a lot of the comments in the "Dont Fight the CCP" thread, maybe that is what the CCP wants. The easiest way for them to deflate the home building bubble without blowing up peoples investments in their own homes is to push investors out of the market. If no one lends/invests in a developer, automatically less supply of homes, which supports the price of homes. Additionally, it takes some of the burden off the government to keep selling huge pieces of land to keep the market saturated. And I can also see the government limiting the number of investment homes people can own or increasing the cost of mortgages to cool the housing speculation.

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I found this short talk by former Australian Prime Minister, Kevin Rudd quite illuminating.  He frames the current changes going on in China under three driving forces:

 

1. Ideology

2. Demographics

3. Decoupling from the US

 

https://youtu.be/cpLECUjTZwQ

 

His feeling is that post Xi's election next year there might be some policy reappraisal but between now and then "fasten your seatbelts"

 

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25 minutes ago, nwoodman said:

I found this short talk by former Australian Prime Minister, Kevin Rudd quite illuminating.  He frames the current changes going on in China under three driving forces:

 

1. Ideology

2. Demographics

3. Decoupling from the US

 

https://youtu.be/cpLECUjTZwQ

 

His feeling is that post Xi's election next year there might be some policy reappraisal but between now and then "fasten your seatbelts"

 

Thanks for posting. This makes a lot of sense to me and gives us an idea about the timelines. Elections seem to matter, even in China.

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14 hours ago, nwoodman said:

I found this short talk by former Australian Prime Minister, Kevin Rudd quite illuminating.  He frames the current changes going on in China under three driving forces:

 

1. Ideology

2. Demographics

3. Decoupling from the US

 

https://youtu.be/cpLECUjTZwQ

 

His feeling is that post Xi's election next year there might be some policy reappraisal but between now and then "fasten your seatbelts"

 

 

Thank you! This is very informative analysis from Kevin Rudd - not that we did not know pieces of individual details, but to put it all together into a coherent framework (latticework of models shall we say) is frankly excellent.

 

I think #1 and #3 are now easy to understand from Kevin's framework and my speculation is that these will be hard to stop even after election (particularly #3 which may have direct effect on US investors and their ownership of China's private companies). I am really curious about #2 (demographics) as lot's of countries have tried and failed to lift birth rates with generous child care policies. For example if you look at countries with most generous child care vs their birth rate (not shown in the fig attached below) there is no correlation. E.g South Korea, Italy, Greece, Spain, Japan etc have some of the lowest birth rates. It is incredibly hard to break downward trend in fertility rate as its a very complex set of factors that determine that.

 

https://www.norden.org/en/news/record-low-birth-rates-three-nordic-countries

"Parental leave of little effect
Karlsdóttir is surprised that the generous provisions for parental leave and childcare in the Nordic countries have not had a greater impact on birth rates."

 

The question is - despite trying in a china specific heavy handed way, will the demographic destiny change? Plus this process will cause collateral damage to private sector, i.e investors, especially foreign ones.

 

 

childcare.thumb.png.60d0d713f894562f722f8a77a53947db.png

 

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Re demographics: Rampant 996 culture ensures that no one is making babies when they finally get home!

Most would expect that the CPC is expecting fewer jobs in the future, and preparing the ground for younger women to leave the workforce and have babies. Creating a baby boom, would be a very smart policy move that also solves a number of problems. 

 

SD

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2 hours ago, SharperDingaan said:

Re demographics: Rampant 996 culture ensures that no one is making babies when they finally get home!

Most would expect that the CPC is expecting fewer jobs in the future, and preparing the ground for younger women to leave the workforce and have babies. Creating a baby boom, would be a very smart policy move that also solves a number of problems. 

 

SD

 

That would only work if the husband's own salary is able to support the whole family, which is not realistic in most cases today when the property prices are sky high and a single earners salary is not able to support the mortgage.

Remember: The US houses are trading at 4-5x median annual household income and most households are single earners. The Chinese condos are trading at 20-25x median annual household income.

Edited by muscleman
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Well most first time homebuyers are not single earners in the US either.

 

I think eventually the Chinese will have to deflate their property bubble- maybe Evergrwnde is actually a convenient start here. Then they will also have to give massive subsidies to those families that have several kids.

 

Those demographic trends are hard to reverse. There is just the biological  lag of one generation, there is also behavioral lag that probably takes many years as well. The US and other countries get help from immigration, but China is just too large for this in terms of population, plus not many would want to move there anyways.

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20 minutes ago, KFS said:

Interesting Evergrande/China Thread:  

Greatly appreciated. The breakdown in Iron Ore prices is nothing short of spectacular.  Under $100/tonne last night.  The South Pacific Peso has held up quite well considering

 

dc0ae0c998711db380d9f9b98895119daae297ed

 

Edited by nwoodman
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4 hours ago, KFS said:

Interesting Evergrande/China Thread:  

 

https://twitter.com/INArteCarloDoss/status/1438944431734919175?s=20

 
His thesis has all the ingredients for panic, fear and selling. Hard for me to understand how things actually play out with CCP though.

 

One side of me wants to believe that fundamental finance & economics play out (lots of leverage, fake demand, overcapacity, loss of confidence -> pain).


The other side wonders if the CCP is able to control it all because it controls everything - have listened to China bears for years - what is the hair that breaks the camels back - is there one?

 

either way worth understanding potential risks to the businesses i own.

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