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

[GRG55]

Let's take a little trip back in time...to the days of Alan Greenspan before the "Sir" was added. To the bucolic days of the spring of 2005:

Greenspan Is Concerned About 'Froth' in Housing

Published: May 21, 2005

WASHINGTON, May 20 - Alan Greenspan, chairman of the Federal Reserve, suggested on Friday that the red-hot housing market is becoming a little too exuberant for its own good...

...Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over "froth" in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country...

Just imagine the feeling of "déjà vu all over again" when I read this...

What bubble?

January 19, 2010

Residents of big Chinese cities are worried about bubbles. It's easy to see why: Shanghai mortgages rose 1,600% in 2009 from 2008 to US$15.58 billion, while residential property prices in the city shot up 68% from 2008 to US$4,571 per square meter. The rapid growth has prompted moves to curb speculation, including – in Shanghai at least – tightening of tax and financing policies on second-home purchases.


Such high rates of growth are of course unsustainable, but it remains too early to talk of bubbles nationwide. Yes, Wang Shi, chairman of developer Vanke, warned that property markets in Beijing, Shanghai and Guangzhou were frothy, but there is more to China than first-tier cities...

[GRG55]

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

Tim Iacono's posted an entertaining short video over on his blog:

http://themessthatgreenspanmade.blog...ty-bubble.html

[GRG55]

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

Jim Chanos on Bubblevision this am...

http://www.cnbc.com/id/15840232?video=1395110201&play=1

[and no, I still can't get the embed feature to work Rajiv]

[jk]

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

andy xie sees it popping in 2012

----------------------------

By Andy Xie 01.10.2010 18:32
Trapped Inside A Property Bubble

When China's real estate bubble finally bursts while exports become less competitive, the consequences could be severe.
The next 10 years will be more challenging than the past decade. Indeed, unless economic policies are adjusted, China's inflated real estate market could suddenly shrivel while the decade is still young.
China's market share gains in global trade and foreign direct investment due to low costs and rising global demand drove the nation's success. But China is no longer the lowest of the low-cost producers, and it's unlikely to gain market share. Moreover, global demand isn't likely to rise as fast as before; expect economic development at one-third previous speeds.
The biggest risk to China's economy is the desire to maintain past economic growth rates by maximizing investments in property -- an unproductive asset. It supports short-term growth by sacrificing long-term growth as capital's average productivity declines over time.
Local government performance in China is measured according to GDP and fiscal revenue. Property development can achieve high numbers for both quickly. This is why property's share in China's capital allocation is rapidly rising as prices appreciate and volumes increase. This is a politically driven bubble -- and it's already massive. Unless the trend is reversed by reforming incentives for local governments, China's property bubble could mushroom in two years from what's now a dangerous level. The burst could happen in 2012, endangering social and political stability.
The first decade of the 21st century began when an IT bubble burst. It was laced with 9-11 and SARS, and ended with a global financial crisis. It was a horrible decade. Now, much of the world has stagnated or regressed. Western prosperity mid-decade turned out to be a mirage manufactured on Wall Street.
The West didn't accept the need for adjusting living standards as emerging economies caught up, which led to a delayed bubble that made the problem bigger. Now the West, particularly the United States and Britain, faces a terrible decade ahead.
Amid the horror, China has risen like no other. Its GDP in dollars has quadrupled while exports quintupled. Adjusting for dilution due to dollar's external depreciation and internal inflation, from outside looking in, China's economic strength has still more than doubled in real value. It is an unprecedented accomplishment for such a massive country. And the primary drivers of success were gains in global trade and investment market share.
Low base, reform and luck could explain China's success. When the Asian Financial Crisis hit more than a decade ago, China chose not to devalue to maintain competitiveness but lowered state sector costs. When the global economy normalized, China became more competitive. Joining the World Trade Organization was an insurance policy that maximized low-cost benefits, and China's global market share tripled. Internally, China built infrastructure for growth without inflation that could erode competitiveness. The policy mix was perfect.
Neither competitiveness nor winning share in a shrinking market can guarantee growth. But by increasing consumer debt, the United States sustained demand while losing in areas of global investment and income. The credit bubble maintained global demand while China's market share gained rapidly. It was a lucky break for China, but now it's run out. The 2008 financial crisis means the United States is likely to cut debt-financed consumption with half as much growth over the next decade, while Europe and Japan are likely to have zero growth.
Meanwhile, China over the past five years has seen rising prices for production factors such as labor, raw materials, land, environmental control and taxes. These prices had been stable previously. Now, wage costs for export factories have roughly doubled in yuan terms, as have raw material prices. Before the Asian Financial Crisis, China's wage costs were half of Southeast Asia's. Now they are twice as high. Bangladesh's wage costs are even lower. It's likely China will lose market share to these low-cost competitors.
Two of three factors for the past decade's success are gone, so China needs to depend more on improved efficiency for growth. But instead, the recent trend seems to be going the other way. Rising costs and weak demand are making manufacturing less profitable. Hence, capital investment is weak, as reflected in weak equipment import data.
Most local governments seem to embrace property development as a growth savior. But shifting surplus capital into property is likely to lower future growth by decreasing average capital efficiency. This deters consumption development by increasing property expenditure expectations, and threatens financial stability by increasing loan levels, using overvalued land as collateral.
Other Asian economies such as Japan, South Korea and Taiwan failed to shed export dependency and develop domestic growth. Periodic spikes in consumption are usually due to asset inflation. Once a country loses export market share on rising costs, it stagnates because property bubbles during high growth periods deter consumption while overwhelming the middle class with housing expenses. China may be following the same path: Despite a decade of talking about promoting consumption, that share of GDP has been declining year in, year out.
Japan stagnated roughly at per capita income of US$ 40,000 over the past two decades. Hong Kong, South Korea, Singapore and Taiwan have stagnated at about US$ 20,000 for the past decade. Stagnation at such high income levels doesn't seem bad. However, China's size means its exports face challenges at much lower per capita income levels. Unless China changes its growth model, it could stagnate at a much lower level.
The overwhelming desire for getting rich quick dominates every nook, fissure and strata of Chinese society. Such desires cannot be fulfilled; the terrible logic of economics is that money must circulate. Creating bubbles can temporarily blind people to this logic, as overvalued assets substitute for money to fill psychological needs. This is why, whenever conditions permit, China seems to have asset bubbles.
Bubbles exaggerate reality but are not formed out of thin air. Cheap money and strong growth are the usual ingredients for bubble-making. Both existed over the past five years. But now, China depends entirely on cheap money to support overvalued assets. Cheap money came from past exports and was warehoused in banks. Cash also came from hot money inflows due to the yuan's peg to the dollar and weak Fed dollar policy.
Neither money source is sustainable. The dollar has bottomed. The Fed will begin raising interest rates in 2010. The combination of China's strong loan and weak export growth is reducing bank liquidity, but inflation soon may force China to tighten anyway. The cheap money may not last long.
China's exports are recovering from a low base – a trend that may last through 2010. But one should not confuse low base recovery with a revival of past trends.
The high export growth era is over for three reasons. China's market share in global trade is twice as big as its GDP share. The odds are low that China could continue to expand its market share. Second, the tide won't rise as fast as before. The Greenspan era saw a credit bubble supercharge western consumption, but the bubble has burst. Odds are that future trade growth will be half or less as in the past. Finally, a western employment crisis will lead to protectionism targeting China. Other developing countries may gain market share at China's expense.
One possible way to prolong the bubble is to appreciate the currency, as Japan did after the Plaza Accord, to contain inflation and attract hot money. Such a strategy will not work in China. Japan's businesses were already at the cutting edge in production technologies and had pricing power during currency appreciation. They could raise export prices to partly offset currency appreciation. Chinese companies don't have such advantages but rely on low costs to compete.
After export-led growth peaks, consumption is the alternative to sustaining growth at a lower rate. This transition would require a wholesale change in the political economy. The key is to increase middle class disposable income and lower consumption costs. No East Asian economy has made this transition.
China has been trying to promote consumption for a decade. However, consumption's share of GDP has declined annually. The reason is the policy environment has been squeezing China's nascent middle class through high property and auto prices along with high income tax rates. China's disproportionate dependency on exports and withering consumption components are results of national policies, not the peculiar characteristics of Chinese households.
A large, vibrant middle class is the foundation of a stable, modern society. China's policies rightfully care for the lower class. Yet the semi-market economy offers a few spectacular gains from arbitrage and speculation. Society is drifting toward a small, super-rich minority along with a small -- possibly less than 20 percent of the population – yet heavily burdened middle class, and a vast, low-income majority. Such an income structure cannot support a balanced economy, forcing export dependence.
China's rapid economic growth has spawned millions of white-collar jobs: managers, engineers, accountants and bankers. Such jobs should provide middle class income for buying property, cars and vacations. However, property prices have increased more rapidly than middle class income, increasing fear of the future.
China's property market is creating winners and losers based on timing. All other factors – including education and experience -- have been marginalized as the economy rewards speculators. And as more play the game, the speculator ranks rise and fewer people work, perhaps contributing to a labor shortage.
In the previous decade, the West refused to acknowledge its competitiveness problem and created a bubble to hide it. I am afraid China could try the same in the next decade, and the consequences could be serious. Fear of consequences could lead many to argue for sustaining the bubble, but that worsens the problem.
During a bubble period, most people think nothing will bring it down. But bubbles always burst, and the longer one is prolonged, the more severe the consequences. Oversupply or rising interest rates will bring down China's property bubble. The former brought down the U.S. bubble, and later Hong Kong's.
China's banks always seem ready to roll over credit lines for developers during market downturns. Hence, supplies tend to dry up during market downturns, preventing price adjustments. Such manipulation has created a speculative psychology that theorizes the government would never let prices fall. When speculators think prices won't fall, speculative demand lasts as long as banks have the liquidity.
The liquidity environment, however, is likely to turn against the bubble soon. The killer is inflation driven by a surge in money printing. The average lag between currency creation and inflation is 18 months in the United States. China's lag could be two years since the government uses subsidies to suppress inflation. By 2012, China could experience 1990s-like inflation. And that's when the property bubble will probably burst.


http://english.caing.com/2010-01-10/100106991.html

[plinko]

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

Reading the above jk, I start to wonder if this may cause an increase in chinese offshore property investment - i.e. buying houses in the US (particularly California, cities with good universities so wealthy Chinese can send their kids to school, and they'll be investing in a place for them to stay)

[GRG55]

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

Let's take a little trip back in time...to the days of Alan Greenspan before the "Sir" was added. To the bucolic days of the spring of 2005:

Greenspan Is Concerned About 'Froth' in Housing

Published: May 21, 2005

WASHINGTON, May 20 - Alan Greenspan, chairman of the Federal Reserve, suggested on Friday that the red-hot housing market is becoming a little too exuberant for its own good...

...Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over "froth" in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country...

Just imagine the feeling of "déjà vu all over again" when I read this...

What bubble?

January 19, 2010

Residents of big Chinese cities are worried about bubbles. It's easy to see why: Shanghai mortgages rose 1,600% in 2009 from 2008 to US$15.58 billion, while residential property prices in the city shot up 68% from 2008 to US$4,571 per square meter. The rapid growth has prompted moves to curb speculation, including – in Shanghai at least – tightening of tax and financing policies on second-home purchases.


Such high rates of growth are of course unsustainable, but it remains too early to talk of bubbles nationwide. Yes, Wang Shi, chairman of developer Vanke, warned that property markets in Beijing, Shanghai and Guangzhou were frothy, but there is more to China than first-tier cities...

China Regulator Said to Seek to Curb Third Mortgages

Feb. 2 (Bloomberg) -- China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans, a person with knowledge of the matter said.

The China Banking Regulatory Commission warned lenders of the risks associated with “hot money” flowing into the property market, the person said, requesting anonymity because the agency hasn’t published the measures. Mortgage defaults in China are rising, the person said without giving figures...

...Lenders extended 952 billion yuan ($139 billion) of home loans in the first nine months of 2009, a fourfold increase from a year earlier, according to the People’s Bank of China.
The PBOC doesn’t break out second or third mortgages.

The CBRC also said capital flows into Chinese assets have increased “noticeably” as investors engaged in so-called carry trades, according to the person. A carry trade involves borrowing in a country with low interest rates, converting the money into a currency where borrowing costs are higher, and lending the funds at a higher rate.

Almost 40 percent of buyers of luxury residential properties worth more than 10 million yuan last year in Shanghai were from overseas, the person said. The CBRC found one case where 38 foreign citizens who never entered China managed to take out mortgages from a bank in Shanghai through their agents and lawyers, without providing necessary documentation, according to the person.

[GRG55]

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

andy xie sees it popping in 2012

----------------------------

By Andy Xie 01.10.2010 18:32
Trapped Inside A Property Bubble

When China's real estate bubble finally bursts while exports become less competitive, the consequences could be severe.

The next 10 years will be more challenging than the past decade. Indeed, unless economic policies are adjusted, China's inflated real estate market could suddenly shrivel while the decade is still young...

...The liquidity environment, however, is likely to turn against the bubble soon. The killer is inflation driven by a surge in money printing. The average lag between currency creation and inflation is 18 months in the United States. China's lag could be two years since the government uses subsidies to suppress inflation. By 2012, China could experience 1990s-like inflation. And that's when the property bubble will probably burst.


http://english.caing.com/2010-01-10/100106991.html

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...

[jk]

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...

lots of others like to quote xie, and leave out the 2012. he's still fixated on 2012. i posted another piece of his this morning. staflation, currency problems, chinese crash: 2012
http://www.itulip.com/forums/showthread.php?t=14211

[Quincy K]

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

Reading the above jk, I start to wonder if this may cause an increase in chinese offshore property investment - i.e. buying houses in the US (particularly California, cities with good universities so wealthy Chinese can send their kids to school, and they'll be investing in a place for them to stay)

I remember hearing the same thing about Florida real estate in 2006 how all those wealthy South Americans were going to buy it all up.

[GRG55]

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

lots of others like to quote xie, and leave out the 2012. he's still fixated on 2012. i posted another piece of his this morning. staflation, currency problems, chinese crash: 2012
http://www.itulip.com/forums/showthread.php?t=14211

I read your post earlier jk, and noted the 2012 date reference, which is consistent with Xie's various interviews and writings for the past couple of months at least.

However, I listened to the roughly nine minute Bloomberg HK interview [available on AOL Video here] and he does say that property developers could "get trapped" this year. Summary of the interview:

• Liquidity still plentiful so China will still see reasonable growth in 2010, but perhaps not as quick as last year;
• Domestic investment is overheating, particularly in property, despite the fact that the overall economy with its large export sector cannot grow very fast [due to employment situation in the USA];
• Monetary policy needs to be tightened before the domestic investment bubble gets out of hand;
• In the wake of the US Budget and deficit announcement yesterday, expects US Treasury yields should rise significantly this year. Expects that China will continue to buy US Treasuries, but will need a higher yield to buy the same or more "There is a price for everything";
• Situation in China driven mainly by the property market and local government investment, both of which were "blown up" by excessive bank lending. Chinese government now in a dilemma as cutting back lending too fast will halt this growth, but doing nothing will create a bigger bubble and inevitable crash;
• Xie estimates that new property sales in China in 2009 rose to 14% of GDP, which he called "unprecedented", rental yields are 2% to 3% and described the amount of sold but vacant property as "humongous". Said "There is a bubble and property prices may be 100% overvalued";
• Property bubble in China differs from the bubbles in the USA and Japan as it involves new property, not existing property. Possibly half of local government revenues come from property sales and this is why land sales at record prices continue as revenue raising activity despite efforts by Beijing to cool things off.
• Lending conditions for buyers of second and third flats have been tightened considerably. This market is dominated by speculators. Difficult to see this demand continuing this year. Developers paying record prices could get trapped this year. After 7 years of rising prices [up 10 to 20 times depending on location] developers believe that land prices only go up, and that may not be the case this year, and some could "lose big money";
• Thinks the resource sector story will be much more long lasting than other stories, like the "economic recovery story" or the "property story". China has a "huge resource shortage" and "huge foreign exchange reserves" so a significant amount of money will be put into the resource sector. "It's not just a 2010 story...it will last for the next few years. This is the only story I have faith in"

[GRG55]

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

I remember hearing the same thing about Florida real estate in 2006 how all those wealthy South Americans were going to buy it all up.

On every speculative run-up the standard real estate story in Vancouver ['GoinUp] is that the Chinese are going to buy every damn house, condo and apartment in the city...:p

[touchring]

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

Xie estimates that new property sales in China in 2009 rose to 14% of GDP, which he called "unprecedented", rental yields are 2% to 3% and described the amount of sold but vacant property as "humongous".

If you include the empty properties, rental yield maybe only 1%. A property tax is enough to wipe out all rent.

[GRG55]

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

Let's take a little trip back in time...to the days of Alan Greenspan before the "Sir" was added. To the bucolic days of the spring of 2005:

Greenspan Is Concerned About 'Froth' in Housing

Published: May 21, 2005

WASHINGTON, May 20 - Alan Greenspan, chairman of the Federal Reserve, suggested on Friday that the red-hot housing market is becoming a little too exuberant for its own good...

...Mr. Greenspan emphasized that he sees no sign of a nationwide housing bubble, but he acknowledged concerns over "froth" in the market and pointed to a big increase in speculation in homes - particularly in second homes. As a result, he said, there are "a lot of local bubbles" around the country...

Just imagine the feeling of "déjà vu all over again" when I read this...

What bubble?

January 19, 2010

Residents of big Chinese cities are worried about bubbles. It's easy to see why: Shanghai mortgages rose 1,600% in 2009 from 2008 to US$15.58 billion, while residential property prices in the city shot up 68% from 2008 to US$4,571 per square meter. The rapid growth has prompted moves to curb speculation, including – in Shanghai at least – tightening of tax and financing policies on second-home purchases.


Such high rates of growth are of course unsustainable, but it remains too early to talk of bubbles nationwide. Yes, Wang Shi, chairman of developer Vanke, warned that property markets in Beijing, Shanghai and Guangzhou were frothy, but there is more to China than first-tier cities...

I think we may have found the Chinese equivalent to Dubai's ski hill in the desert...a village of 30,000 with plans to build not one, but two massive towers rivalling the tallest in the world. This is mass insanity...

China New Village Makes Chanos See Dubai 1,000 Times

Feb. 22 (Bloomberg) -- The township of Huaxi in the Yangtze River Delta is a proud symbol of how Chinese communists embraced capitalism to lift 300 million people out of poverty during the past three decades.

Its leaders took a farm community with bamboo huts and ox carts in the 1970s and transformed it into an industrial and commercial powerhouse where today many of its 30,000 residents live in mansions and most have a car. Per-capita income of 80,000 yuan ($11,700) -- almost four times the national average -- allows Huaxi to claim it’s China’s richest village.

Huaxi is also emblematic of the country’s construction and real estate boom. Communist Party officials there are building one of the world’s 30 tallest buildings, a 2.5 billion yuan, 328-meter (1,076-foot) tower. The revolving restaurant atop the so-called New Village in the Sky offers sweeping views of paddy fields, fish ponds and orchards, Bloomberg Markets reports in its April issue.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”

Huaxi has an even more ambitious project coming up: a 6 billion yuan, 538-meter skyscraper that would today rank as the world’s second tallest. The only loftier building is the new Burj Khalifa in Dubai...

...Instead of concentrating on their core businesses, giant state-owned enterprises, or SOEs, have bet on real estate, according to Zhang Xin, a former Goldman Sachs Group Inc. analyst who’s chief executive officer of Soho China Ltd., the biggest property developer in Beijing’s central business district. “All the SOEs are bidding the prices up to the sky,” Zhang told China International Business, a magazine backed by China’s Ministry of Commerce, in December. That’s despite office vacancies in China’s capital being at record highs, according to Boston-based commercial real estate company Colliers International...

...Local-government officials have wasted stimulus funds by replacing infrastructure that was fine in the first place. State media complained in May 2009 that party chiefs in Jianyang, Sichuan province, decided to help boost the local economy by rebuilding a bridge that was in such good condition it had emerged unscathed a year earlier from the earthquake that killed 70,000 people. The so-called Bridge of Strength withstood a demolition crew that tried to blast it to pieces with dynamite, the official China Daily reported...

...Still, even Mobius says investors have to be wary. He got rid of an investment in a Chinese food company after discovering that it was using funds to buy apartments instead of to process soybeans.

[GRG55]

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

Vitaliy Katsenelson, 'China - The Mother Of All Black Swans'

[jk]

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

Vitaliy Katsenelson, 'China - The Mother Of All Black Swans'

a widely predicted "surprise" seems a bit of an oxymoron. katsenelson joins chanos and andy xie and many others in this prediction. hardly a "black swan," therefore. terminology aside, however, it does look like china has a growth and property bubble. faber and rogers may be right in the longer term, but the intermediate future looks fraught. but then do commodity prices go down? i would think so, but i also think that would be the last, best buying opportunity for the longer term. otoh, i am not so persuaded of a deflationary china crash to sell my current commodity holdings. are you?