Wednesday, April 14, 2010

Andie Xie: "China's Property Market Is One Of The Biggest Bubbles Ever..."

We really live in very interesting times.....The update comes just in time for todays headline Property prices in China grew at the fastest pace in nearly five years in March.... The "Wall Of Worry" is getting steeper on a daily basis.... For more on the "China Syndrome" see here, here, here , here & here.....

Aufregende Zeiten.......Passend hierzu die heutige Nachricht Property prices in China grew at the fastest pace in nearly five years in March nicht passen....Eine ausführlichere Betrachtung des immer ernster werdenden "China Syndrome" gibt es hier, hier, hier , hier & hier.....

Empty : Though many of the properties in Kangbashi have been sold and a million people were projected to be living in Kangbashi by 2010, the city is still empty.

Ordos,China: A Modern Ghost Town Photo Gallery TIME
H/T The Mess That Greenspan Made

No Room To Relax Andy Xie / China International Business

The central government has unleashed another round of property tightening measures. This time it is focusing on mortgage lending terms: the mortgage interest discount for first-time homebuyers has been reduced; the discount for second-time homebuyers has been abolished and the down payment requirement raised to 40%; and the rate for third-time buyers is being left to the banks' discretion with down payments raised to 60%.

Predictably, sales volumes in both primary and secondary markets have collapsed. But no one is panicking, not even those who live off the property bubble. Why? Aren't they supposed to be terrified of the government's crackdown?

It seems we have seen this movie before. China has launched property-tightening measures several times but it relaxed them just when they began to bite.

The bottom line is that local governments, and the central government through them, depend very much on property for revenue. The market doesn't believe the government will cut off the hand that feeds it.

Local governments and developers are sitting on massive liquidity that they raised last year through land and property sales and borrowings, taking advantage of the "anything goes" window during the stimulus period. They seem to believe that the central government will change its mind before they run out of liquidity. So they are comfortable waiting and not cutting prices.

Cutting prices doesn't make sense if the government is expected to loosen policy again soon. The current lending terms effectively keep second- and third-time homebuyers out of the market. To sell, developers must cut prices to levels affordable to the buyers of first homes, who have low incomes and little wealth. All the players will play by the new rules only if the central government proves its credibility by maintaining the tightening policy until local governments and developers run out of money.
Contrary to the policies' intent, local governments are readying for another round of property inflation. Local governments have been using bank loans to resettle residents, and resettlement costs have skyrocketed since those being moved need enough compensation to buy properties at today's prices. Unless property prices rise considerably, local governments will end up losing money, which they cannot afford to do.

Resettlements played an important role in supporting demand for property last year. The overwhelming majority of end-user purchases probably came from resettled residents who used their compensation money for a down payment.

Resettlement compensation is the biggest transfer of wealth from the government to the household sector since the privatization of public housing at low prices a decade ago. It is probably the most important government action supporting today's economy.

The positive elements of resettlement compensation come with two major negatives. First, it is using a form of leverage to support demand. Local governments borrow to pay the compensation packages, using the land as collateral. The resettled residents use the compensation as down payment for mortgage borrowing; so government debt becomes equity for mortgage debt.

There is no real equity in the financing chain

China's property market is a massive bubble. The stock of residential properties, developers' inventories, and land that local governments have pledged to banks may exceed by three times the gross domestic product.

Get the yuan right, and prove pundits wrong Andy Xie / Caixin

Yuan appreciation hype ignores China's need for higher rates

The intensity and persistence of yuan appreciation expectations point to support for China's vast property bubble. These expectations have increased the concentration of hot money in China, which in turn has caused excess liquidity and speculation, fueling the property bubble.

By all measures (stock value to gross domestic product ratios, inventory value to GDP ratios, new property sales to GDP ratios, price to income ratios, rental yields and vacancy rates), China's property market is one of the biggest bubbles ever. It's probably much bigger than the U.S. property bubble relative to GDP.

Now, the same liquidity that fueled the property bubble is leading to a rapid pickup for consumer price inflation. One just needs to look around to see the seriousness of the inflation picture, regardless of how it's measured. Denying that inflation is serious in China right now is akin to burying one's head in the sand. This sort of denial is how countries in Southeast Asia got into a crisis situation in the past: They kept real interest rates too low and fueled speculation that eventually destroyed their banking systems.

If China's economic stimulus is withdrawn, the property bubble will cool. And it may even burst. This is why so many interest groups consistently argue against higher interest rates. Instead, they support using currency appreciation to cool inflation.

Many analysts argue that raising interest rates would attract more hot money. This is wrong. Hot money comes to China for currency appreciation and asset-bubble reasons, not to chase interest rates. When an interest rate is raised, expectations for property-price appreciation wane and hot money is more likely to fall than rise.

Increasing the yuan's value a bit would certainly trigger more frenzy. Any new property booms that follow may support the economy for a time. But the long-term consequences would be severe. Indeed, a small appreciation could make a crisis inevitable.

UPDATE:

Top ten reasons you know China has a financial bubble on its hands Ed Harrison

Jim Chanos On Charlie Rose - Full Interview ZH

China’s Debt Bubble: When Will the Ponzi Unravel? NC

Chinese consumer credit binge begins FT Alphaville

China - The Mother of All Black Swans ZH

Red hot real estate Economist Free Excahnge

China Bond Risk May Offset Reward WSJ

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