Yes Virginia...It's a Bubble...

[we_are_toast]

Re: Yes Virginia...It's a Bubble...

My wife owns a piece of property in Peru. The value has doubled in the last 18 months and has tripled in the last 3 years.

Seems to me that housing bubbles are simply another industry that we've exported to emerging market nations.

[friendly_jacek]

Re: Yes Virginia...It's a Bubble...

My wife owns a piece of property in Peru. The value has doubled in the last 18 months and has tripled in the last 3 years.

Seems to me that housing bubbles are simply another industry that we've exported to emerging market nations.

People in emerging markets used to pay cash for real estate. When mortgages become widespread, real estate will appreciate a lot. This can go on longer than expected and it's dicey to predict when it pops, unless governments are gutsy to pup the bubble themselves.

[GRG55]

An Alternate View From the Inside...

From the "Where There's Smoke, There's FIRE" file...

Wen Warns of Bank Risks, Pledges Property Crackdown

...

From the Calculated Risk blog:

Wednesday, March 10, 2010

Bubbling over in China?

From CR: There are so many reports of a housing bubble in China, I asked a friend living in China for his thoughts ... this is his view:

From Michael Kleist in Shanghai:

News of soaring housing prices in China, which are now hovering around late 2007 peaks, naturally invites talk of bubbles and excessive speculation. More so, since the 2007 highs led to a humbling drop in prices for homeowners and investors in 2008. Are things heading that way again in 2010?

Not necessarily.

Let’s start with the news in the papers. See the WSJ today: China Property Prices Surge

It’s clear the housing market in China has been hot, topped by February’s 10.7% YoY increase in prices. In fact, housing prices have been rising for 9 straight months YoY in China, which coincides to some degree with the government’s massive stimulus package that took effect first quarter 2009.

Certainly there is some speculation inside these numbers, as there would be in any hot property market. The government has shown enough concern on this point, and overheating in general, to tell banks last month to curtail lending and increase reserve rations.

But the bigger reason for rising home prices in China may simply be due to an imbalance in supply and demand...

...What we are seeing today is that with fewer homes on the market after a nearly 2 year lull in building, the prices have continued to climb.

This imbalance will likely even out as the homes started in 2009 become available for sale. Most likely, this will result in a stabilization of prices but not a bursting bubble because it’s not even clear there is a housing bubble in China.

Certainly there isn’t a mortgage credit-related bubble. The majority of homes in China are purchased with down payments between 30-40%, which is required by the banks, and nearly 25% of homes are purchased with all cash...

...Still, it is clear that prices in tier 1 cities such as Beijing, Shanghai, and Shenzhen in the south have risen to amazing levels for China. Flats in downtown Shanghai can sell for RMB150,000 (US$ 22,000) per square meter with exclusive homes in prime locations commanding even higher prices. To get a new home for under RMB18,000 (US$2,640) per square meter certainly requires a trip to the suburbs and only a hope of being near a subway line...

30 to 40% down payments, with less desirable [off subway line] suburban prices at $250 per sq ft? Either the Chinese are already a lot richer than most people in the USA, or there is something going on here that requires an explanation. They aren't paying these prices working in a factory for a buck an hour...:p

[GRG55]

Another Alternate View - Stephen Roach

From the Calculated Risk blog:

Wednesday, March 10, 2010

Bubbling over in China?

From CR: There are so many reports of a housing bubble in China, I asked a friend living in China for his thoughts ... this is his view:

From Michael Kleist in Shanghai:

News of soaring housing prices in China, which are now hovering around late 2007 peaks, naturally invites talk of bubbles and excessive speculation. More so, since the 2007 highs led to a humbling drop in prices for homeowners and investors in 2008. Are things heading that way again in 2010?

Not necessarily.

Another alternate view...this time from Stephen Roach:

[Commentary from the ZH site]:

Stephen Roach "Unlike The US Which Lets Bubbles Get Out Of Hand, That's Not The Case In China"


The chairman of Morgan Stanley Asia Stephen Roach blasts China skeptics, "The idea that [China] is an overheated economy is very much overblown," in this Bloomberg TV interview. Roach, who despite his global skepticism, continues to see China as a source of growth despite the numerous flashing warning signs. One area of ongoing concern - protectionism "As we go toward the mid-term elections in the US, the protectionist drumbeat is something to take seriously." When looking purely at China, Roach notes that "the dynamic needs to shift from the export sector to 1.3 billion Chinese consumers. They need to build a safety net, they have to come up with new sources of job creation, and they have to provide stimulus to their rural population which numbers roughly 850 million people. Since 2000 between 15 and 20 million rural citizens have moved into urban settings, that's like two New York cities per year. The lack of a safety net is a profound drag on Chinese consumption." Good luck with creating a safety net that big. Yet despite that Roach takes a direct stab at Chanos, and concludes that the "fears of a bubble are vastly overblown, in China. The demand for shelter, the demand for office space in a nation that does rural-urban migration 15-20 million people per year, that demand is there. No country has such demand for urban dwellings and urban office space... The Chinese authorities are on top of it. Unlike the US, which lets bubbles get out of hand, and distorts the economy, that's not the case in China."...

[Starving Steve]

Re: Yes Virginia...It's a Bubble...

The Americans still do not understand that China's economy is real; it's based upon EXPORTS and SAVINGS and PRODUCTION and MANUFACTURING. That economy is growing at 8% per year, and compounding too. So, there is plenty of room for China's real estate to go up in price.

It is very difficult to communicate with Americans to-day because they just don't face the facts around them. With a few exceptions like GE and Siemens, American companies know very little about the power of manufacturing, producing, exporting, and saving money for the future.

Contrast China's real estate mania to the bubble in California real estate. When you can drive thru Silicon Valley during rush hour at 105 kph ( 65 mph ), where are the jobs that are needed to support the over-priced housing market there?

Instead of pointing fingers abroad, Americans had better reflect inward about their own bubbles and the inflationary policies of their U.S. Federal Reserve Bank.

[GRG55]

Re: In Search of Goldilocks...

China to Nullify Financing Guarantees by Local Governments

March 8 (Bloomberg) -- China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local- government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”...

That last part sounds familiar...:rolleyes:

China May Face ‘Massive’ Bank Bailouts After Stimulus Program

March 13 (Bloomberg) -- China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih.

In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.

“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities...

...Citigroup’s Shen said officials may keep monetary policy loose for longer than they should, boosting asset prices and building up overcapacity, to avoid the “squeeze” on investment vehicles that would trigger bad loans and bailouts...

...Su Ning, a deputy governor at China’s central bank, said March 8 that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said in Beijing...

[Southernguy]

Re: Yes Virginia...It's a Bubble...

Something to think about: Wherever you go in the world, from Shangai to Miami, in any supermarket or store, most of whats being sold is Made in China.
That´s not the case of UK, or USA or Spain or Dubai. There´s a big difference.
Clearly, there surely may be some kind of bubble or even bubbles inflating in China, but if there are, they´re significantly different.

The Americans still do not understand that China's economy is real; it's based upon EXPORTS and SAVINGS and PRODUCTION and MANUFACTURING. That economy is growing at 8% per year, and compounding too. So, there is plenty of room for China's real estate to go up in price.

It is very difficult to communicate with Americans to-day because they just don't face the facts around them. With a few exceptions like GE and Siemens, American companies know very little about the power of manufacturing, producing, exporting, and saving money for the future.

Contrast China's real estate mania to the bubble in California real estate. When you can drive thru Silicon Valley during rush hour at 105 kph ( 65 mph ), where are the jobs that are needed to support the over-priced housing market there?

Instead of pointing fingers abroad, Americans had better reflect inward about their own bubbles and the inflationary policies of their U.S. Federal Reserve Bank.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Something to think about: Wherever you go in the world, from Shangai to Miami, in any supermarket or store, most of whats being sold is Made in China.
That´s not the case of UK, or USA or Spain or Dubai. There´s a big difference.
Clearly, there surely may be some kind of bubble or even bubbles inflating in China, but if there are, they´re significantly different.

How so? Are Chinese bubbles [if they are indeed bubbles in the first place] immune from collapse for some reason?

Frankly, if I understand your argument correctly, I think it makes the Chinese [and other surplus economy] bubbles more dangerous than the ones in the "UK, or USA or Spain or Dubai"...because as long as those governments pursue a mercantile policy at all costs, including the attendant and mandatory requirement to keep sterilizing the incoming foreign earnings to hold down the exchange rate of their currency, there would appear to be no effective current or pending restriction on the air supply feeding the balloon. My expectation, therefore, is that the surplus economy domestic bubbles have the potential to reach gargantuan proportions that exceed what we've experienced elsewhere to date - and may be years away from ending*

But like all bubbles, end they will.

* [I am mindful of calls, which may come later this year, that the current real estate "bubble" has been successfully "managed" by the Chinese authorities, thus sending an unmistakable "all clear" signal to Chinese speculators to get the game back in high gear].

[Southernguy]

Re: Yes Virginia...It's a Bubble...

I am trying, as probably most of Itulipers, to asess future economic develpments.
To that effect predicting the course of China´s is essential. Well, that´s certainly not a brilliant or original deduction.
The difficulty is that there seem not to be reliable, on time, and detailed economic information about China.
There are, no doubt, signs of a real estate bubble inflating.
There is, as well, (or at least so is declared officialy) an awareness of the Chinese authorities of the former.
And, as they are not elected, or at least not so by Occidental standards, they have more alternatives to put such bubble to an end, or at least to slow it.
On the other hand there is a real and productive economy developing in China.
All said does not imply that: such bubble or bubbles do not burst or that their bursting is not damaging to world economy.
China is on the way of creating a local market for at least some of the goods it produces.
Both they have to because of the protectionist measures other countries are naturally implementing, they want it or not. Europe and the USA are on the way of reducing their consumption standards if only just for the enormous debt they carry on.
But also because of a natural development of their population apetites. It´s sheer nonsense that the Chinese people live in poverty, most of them, so as to finance the absurd occidental way of life.
They have to make, then a gigantic shift.
The image coming to my mind is braking a very hign speed train, with little distance to go.
Shall the Chinese Comunist Party be able to do it?
And of course, if they cannot achieve it there is going to be an economic earthquake all over the world.
And, also, other Damocles swords are hanging up there, such as, oil prices and the European indebted nations.
If China has some kind of economic seismic movement, commodities are going to have a big shake down.
And that has, of course big investment implications.

[jk]

Re: Yes Virginia...It's a Bubble...

i have read that chinese capital inflows exceed their trade surplus. some of this may fdi, but some is hot money moving into real estate as a way to play the currency. [i.e. how do you invest in a currently non-convertible currency? buy real estate there.] so one question is: given the big downpayments, how much of the downpayments in aggregate were borrowed abroad in another currency? if the yuan becomes convertible, it might go down instead of up, as foreigners repatriate capital, and locals seek to diversify.

[aaron]

Re: Yes Virginia...It's a Bubble...

http://www.google.com/hostednews/ap/...RrwZQD9EDOF7G0

China is going to bid on a high speed rail contract in the U.S. I do not think J6P is ready for that. It is a big wake-up call.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Looks like he may not believe his original 2012 date now?

China Property Market ‘Bubble’ Set to Burst, Xie Says

Feb. 2 (Bloomberg) -- China’s property market “bubble” is set to burst as the government curbs credit growth and clamps down on speculation, according to independent economist Andy Xie.

As bank lending slows, “it’s very difficult to see this demand continuing,” Xie, formerly Morgan Stanley’s chief Asian economist, told Bloomberg Television in Hong Kong today...

...“We’re seeing some significant measures that have been introduced in the last couple of weeks,” Xie said. “If these changes are implemented, the demand from third-flat buyers is going to dry up and it’s going to have a major impact.”

Many properties bought for investment are now left vacant and rental yields are low, pointing to a “bubble,” Xie said...

More from Andy on China property...

By Andy Xie
03.22.2010 17:54
Frayed String for China's Property Balloon

Don't expect China's property bubble to shrink as long as Beijing tinkers with rules but neglects credible reform

(Caixin Online) Beijing has unleashed another round of property market tightening measures, and this time it's tightening mortgage loan terms considerably: The mortgage interest discount has been reduced for first-time homebuyers; the discount has been abolished and down payment requirement raised to 40 percent for second-time homebuyers; and rates are at banker discretion while the required down payment has been raised to 60 percent for third-time buyers.

Predictably, sales volumes in the 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 when Beijing cracks down?

It seems we have seen this movie before. Beijing launched property tightening measures several times in the past but then relaxed as soon as the market felt the bite. The bottom line is that local governments, and Beijing through them, depend very much on property for fiscal revenues. And now, the market does not believe the government will cut off the hand that feeds it.

Local governments and developers are sitting on massive amounts of liquidity they raised last year through land and property sales and borrowings while taking advantage of an "anything goes" window open during the economic stimulus period. They seem to think Beijing will change its mind before their liquidity runs dry, so they are comfortably waiting without cutting prices...

...Contrary to Beijing's policy 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.

Such 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 cash for down payments.

Resettlement compensation is the biggest transfer of wealth from the government to the household sector since the privatization of low-cost public housing 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 uses a form of leverage to support demand. Local governments borrow to pay compensation packages, using land as collateral. Resettled residents use compensation cash as down payments for mortgages. In this way, government debt becomes equity for mortgage debt; there is no real equity in the financing chain.

Second, although high compensation payments benefit resettled residents, they make local governments a player in further inflating property prices. Ultimately, the costs will be borne by China's nascent middle class...

[GRG55]

Re: In Search of Goldilocks...

China May Face ‘Massive’ Bank Bailouts After Stimulus Program

March 13 (Bloomberg) -- China may be forced to bail out banks that made loans for local-government projects under the unprecedented stimulus program unleashed in 2008, according to Citigroup Inc. and Northwestern University’s Victor Shih.

In a “worst-case scenario,” the non-performing loans of local-government investment vehicles could climb to 2.4 trillion yuan ($350 billion) by 2011, Shen Minggao, Citigroup’s Hong Kong-based chief economist for greater China, said yesterday.

“The most likely case is that the Chinese government will engineer a massive financial bailout of the financial sector,” said Shih, a professor who spent months researching borrowing by about 8,000 local government entities...

...Citigroup’s Shen said officials may keep monetary policy loose for longer than they should, boosting asset prices and building up overcapacity, to avoid the “squeeze” on investment vehicles that would trigger bad loans and bailouts...

...Su Ning, a deputy governor at China’s central bank, said March 8 that a “fairly high proportion” of total lending last year went to the funding vehicles. Chinese banks extended a record 9.59 trillion yuan of new loans in 2009. Su sees “a big risk” from local-government guarantees for money borrowed to fund infrastructure projects that may not generate returns, he said in Beijing...

Still inflating...

Independent Strategy is a research outfit headquartered in London, UK.

From the Naked Capitalism blog:

"...Independent Strategy’s latest report, “China’s credit bubble: the missing piece in the jigsaw” makes a persuasive case that China’s debt fueled growth model is due for a hard landing, but the timing is uncertain, since the debt is funded internally...

...This piece does a concise job of recapping some of the troubling conditions undergriding the seemingly robust Chinese economy. A particularly striking one is the dramatic fall in the productivity of borrowing. In 2000, it took only 1.5 RMB of credit growth to produce an additional RMB of GDP growth. It now takes 6 RMB of credit to produce 1 RMB of GDP growth. It has become conventional to decry borrowing in the US because it has supported consumption, but debt that supports unproductive investment (factory overcapacity, overbuilding of high end housing, land speculation) is no better...

"...We now know that much of the credit explosion in 2009 that boosted economic growth went into local government entities where it was wasted on unproductive real estate and infrastructure projects. These entities are mostly insolvent and will create huge bad debts for the banks as credit is tightened this year….

China is an economy where bank credit equals 130% of GDP — twice the penetration of peer emerging markets and where credit grew by one-third last year, adding money to the system equal to nearly 40% of GDP…."

[GRG55]

Re: Yes Virginia...It's a Bubble...

More from Andy on China property...

By Andy Xie
03.22.2010 17:54
Frayed String for China's Property Balloon

Don't expect China's property bubble to shrink as long as Beijing tinkers with rules but neglects credible reform...

A picture may be worth a thousand words. Here's 14 interesting pictures...

[ht to Tim Iacono at The Mess That Greenspan Made]

[Sharky]

Re: Yes Virginia...It's a Bubble...

Here's a link to an article about the China bubble, including a few stats and photos:

http://www.minyanville.com/businessm...6852?page=full