Chinese government policy change kills Coastal California housing market - Coastal California housing demand from Chinese nationals surged in recent years; however, Chinese officials abruptly shut down this source of demand - The people who deny a real estate bubble in China are wrong, and the deflating Chinese property bubble could destabilize the world economy, but of greater interest to owners of Coastal California real estate, the deflating Chinese housing bubble could turn local real estate buyers into desperate sellers.
Both homebuilders and real estate agents delude themselves with notions about the desirability of Coastal California to convince themselves the influx of Chinese money is based on sustainable fundamental factors. In reality, this is hot money escaping a collapsing market, subject to the policy whims of an unpredictable totalitarian government. Chinese capital is an unstable source of investment, and it could reverse course in a moment based on policy changes in China.
Most California real estate market bulls and enthusiasts blithely assume the influx of Chinese money will never stop because everyone in China wants to live here, right? Unfortunately, in the real world, for money to leave China, it generally has to pass through a Chinese bank and get wired to an overseas location. The Chinese government could easily stop the flow of electronic capital by decree, and it appears they plan to exercise this power to shut off the flow of capital leaving China for US real estate.
Mod: A website that calls itself Quartz (link) has an article up with an intriguing title. Here is a taste of what they're sharing:
A Chinese housing market crash could be even more disastrous than America’s - Investment drives China’s economy. And housing fuels a large share of that investment, contributing 33% of fixed-asset investment, says Zhang Zhiwei, an economist at Nomura—and, consequently, 16% of GDP. The decade-long housing boom that’s kept China’s GDP aloft has so far defied the bubble warnings, which began as far back as 2007.
But the building binge is finally catching up with China. Not just because sales are faltering (paywall). After building around 13.4% more floorspace each year, China finally has too much housing, argues Zhang in a note this week. The quirks of China’s economic model mean that a housing crash will be more devastating for the economy than many realize.
This time China’s property bubble really could burst - Chinese property is the most important sector in the global economy. It has been pivotal in the country’s economic development, provided lucrative business for industrial commodity producers from Perth to Peru, and been the backbone of the surge in world exports to China. In the past few years, predictions that the sector was about to implode at any moment have not been borne out – but now is the time for the world to pay attention. Property activity indicators have been trending lower since mid-2013, and the downturn in the sector now threatens to turn into a bust. At best, China is entering a deflationary phase at a time of global fragility.
The default risks in the weakly regulated shadow banking sector – and the rapid rise in local government debt – are real, and property-related. Yet the government and the central bank have tools to limit the short-term consequences; they have already deployed debt rollovers, bank bailouts and recapitalisations.
The greater risk to China lies in the pervasive consequences of any property bust. Property investment has grown to account for about 13 per cent of gross domestic product, roughly double the US share at the height of the bubble in 2007. Add related sectors, such as steel, cement and other construction materials, and the figure is closer to 16 per cent. The broadly defined property sector accounts for about a third of fixed-asset investment, which Beijing is supposed to be subordinating to the target of economic rebalancing in favour of household consumption. It accounts for about a fifth of commercial bank loans but is used as collateral in at least two-fifths of total lending. The booming property market, moreover, has produced bounteous revenues from land sales, which fuel much local and provincial government infrastructure spending.
The reason things look different today is the realisation of chronic oversupply. As the property slowdown has kicked in, housing starts, completions and sales have turned markedly lower, especially outside the principal cities. Inventories of unsold homes in Beijing are reported to have risen from seven to 12 months’ supply in the year to April. But when it comes to homes under construction and total sales, the bulk is in “tier two” cities, where the overhang of unsold homes has risen to about 15 months; and in tier three and four cities, where it is about 24 months.
The anti-corruption crackdown, often targeting individuals who have built up ostentatious property wealth, has poured cold water over the market, in which, according to a recent investment bank report, the richest 1 per cent of households is estimated to own about a third of residential property. Elsewhere, the tightening of credit terms, including funding costs for property developers, especially in the shadow banking sector, is taking its toll. Rates of return on commercial property and infrastructure, and cash flows for developers and local government, have been deteriorating.
Mod: If you go back to the Redfin site you can read the following: "Find Sierra Madre homes for sale. In Sierra Madre see 17 homes for sale with a median price of $979,000." That is quite a few houses to be on the market here at one time, and a lot of money for houses that on average are not much larger than 2,000 square feet ... But perhaps we should also consider this. What will the end of the Chinese real estate bubble mean for projects such as One Carter, Mater Dolorosa and Stonehouse? Will there be that much money around for the kinds of crazy prices the developers of those vast hogans are hoping to get? Perhaps not. All of this may already be over.