Wednesday, November 30, 2011

Property Market Turning Sour in China

Bloomberg posted an article today about Chinese apartment/home buyers who are demonstrating against their landlords/developers as prices are falling:
On Nov. 19, Deng faced off a ring of security guards three rows deep wearing camouflage and carrying shields as he joined more than 100 homeowners rallying in front of the development’s sales office. His transformation from newlywed to street protester came after China Vanke Co. slashed prices for future buyers at the Qinglinjing complex, erasing about 20 percent of the value of his three-bedroom unit overnight.
The story goes on to explain how Deng's parents contributed their savings and Deng's boss provided a loan so that he could meet the 30% minimum down payment on the apartment.  He was only able to contribute 4% of the down payment himself.

The article also tells the story of Zuo Hangxai,who "became a home owner after losing patience waiting for years for prices to come down. She recalled the frenzied scene when she picked her apartment in the same development as agents crowded around urging her to buy and then clapped and congratulated when she nodded agreement."

Evil Developers and Buyers Remorse
While I will contend that even in Zuo Hangxai's case, the people now protesting were willing buyers, the Chinese market has experienced a super-bubble which was aided by the developers.  Developers near major cities had worked with the government to remove people from their current homes in order to demolish them and build massive complexes.  There were many stories and videos about these cases a few years ago.  Unlike here in the US, where there's a more rigid legal process for trying to evict someone, many of the Chinese who fought back would leave their homes for work and return to a pile of rubble.

Without a home, these people become buyers, and perhaps end up buying from the companies who destroyed their homes.

On the other side, China's super bubble was largely driven by rising demand and rising home prices, which led to price appreciation and speculation to an extreme degree.  Many middle class families were priced out of even modest new homes and apartments because of the rampant speculation.  Developers were happy to build more units knowing they could get a great price, and incremental buyers were happy to pay because they expected to flip the unit at a substantial profit.

As we experienced here in the US, eventually the music stops and some are left without a chair.

For the US, housing prices topped out sometime in mid-2006.  More than five years later, our housing market still hasn't recovered.  Anyone who bought near the top probably felt like demonstrating back in '07 and '08.  I would suppose the reality of the situation has sunk in at this point - those who bought at the top, for whatever reason, may never recoup their "investment".

For Deng and Zuo, I think the worst is yet to come.  The same Bloomberg article says that the home ownership rate in China is 87.8% compared to 66.3% in the US.  That is a staggering difference and is very bad news for current home owners.

In the US, that means as prices fall, 33.7% of the population could conceivably enter the market and buy a home.  In China, that number is 12.2%.  Roughly one in ten people are not homeowners!  Who do the other nine of ten sell their home to?

I don't know all of the socio-economic reasons behind such a high rate of homeownership, but the article does give a few hints:
Deng had moved to Shanghai three years earlier from a small city in the north to be closer to a girl he met in college. When talk turned to marriage, his girlfriend insisted they buy an apartment first, he said. “At my age, I should get married and I should have my own home whether or not I can afford it so that I can be the same as my classmates,” Deng said.
#1 - China's One Child Policy which led to infrantricide towards female newborns, has led to a massive imbalance in the sexes.  If you are a young adult male in China, looking for a wife, you've got some darn stiff competition and need to prove your worth (buy a home).  See also - China: Too Many Men.
#2 - China's burgeoning middle class also comes with "Keeping up with the Joneses" syndrome we know well in the US.  Deng feels like he should own a home whether or not he can afford it so that he can fit in and also get a wife.

Financial Crisis Looming
China's centrally managed economy may be able to weather the oncoming property bust better than we could here in the US.  Bear Stearns, Lehman, and other major financial firms collapsed or nearly did because of their exposure to the US housing market and because there were at least some rules they couldn't avoid (such as marking down investments to current market prices).  The US government then took steps that were clearly anti-capitalism and maybe illegal to prevent the situation from getting worse.

In China, I would suspect the government will be much quicker to support firms and the economy and can more easily re-write the rules.  If the Industrial and Commercial Bank of China found one day it was insolvent, the government could more easily make direct loans, rework the bank's lines of credit, or restrict withdrawals.

Given what seems to be massive over-development in China, I can't imagine this ending well.

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