Tuesday, September 2, 2014

Is Our Chinese Funded Housing Bubble About To Burst?

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Mod: There is a very interesting series of reports from a site called OC Housing News, which you can link to here. What is being claimed by OCHN is that the current California housing bubble is being largely fueled by cash from China that is, to use their term, "hot money." In others words, it is being illegally spirited out of China through the auspices of corrupt mainland bankers, and reappearing here where it is being invested in good old West Coast real estate. The only problem being the regime of what is still very much a Communist country is not only on to this, they are also not very amused. The cause of all this unhappiness? The real estate bubble there is just about to pop. Check it out:

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.

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Mod: The consequences to our local real estate market could be interesting. If you go to the local Redfin site (link) you can see that in this year alone approximately 100 Sierra Madre homes have been unloaded, and for a lot more cash than they were probably worth. Many were sold by people who realized that they could get a lot of money for their lovable shanties, and then use the profit to purchase something of relatively greater value elsewhere. But what happens when an extremely large chunk of volatile Chinese real estate money disappears? The following extended cite from The Financial Times of London lays it all out, complete with corruption trials (link):

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.

http://sierramadretattler.blogspot.com

30 comments:

  1. I've seen this coming and I hope it's true.

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  2. Actually Mr. Mod,
    77 homes have closed escrow in the last 90 days in S. Madre. That's over 300 sales if you annualize it over 4 quarters.
    Maybe Finance Director Karin left so she wouldn't have to apologize for her gross underestimate of the resulting property tax revenue

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    1. Karen's husband got a big promotion to move to San Francisco. Why would she stick around?

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    2. Nobody with options would.

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  3. Sounds like the Chinese housing market was a kind of a ponzi scheme.

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  4. The Chinese Housing Ponzi Exposed: "As We Sell Our First Apartments, We’ll Have Cash Flow To Build The Next Stage"

    http://www.zerohedge.com/news/2014-04-23/chinese-housing-ponzi-exposedd-we-sell-our-first-apartments-we’ll-have-cash-flow-bui

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  5. Chinese economy a Ponzi scheme about to blow-up warns Morgan Stanley
    http://www.arabianmoney.net/us-dollar/2014/03/23/chinese-economy-a-ponzi-scheme-about-to-blow-up-warns-morgan-stanley/

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  6. Worst (saddest) thing I saw was just before the house on Santa Anita, two houses out from the ARCO station, proud as punch Chinese family, man, woman, two kids (sorry, no dog) standing on the bulldozer delivered to smash down the lovely 1960's ranch house.

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    1. I have seen what's being built there. Sorry kids are being exposed to that.

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    2. The saddest thing you saw was a home being built two houses up from the ARCO staton, two houses up from a major thoroughfare. Noise, air polution, artificial light intrusion, and the unseeable fumes from thousands of gallons of fuel being dispensed. The Chinese family had every reason to be proud of their ability to build a home; those homes are neither architectural gems nor candidates for inclusion in a rotogravure.

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    3. Yeah, why have a human size structure when you can build one for temporarily economic giants.

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    4. To the saddest thing seen ... I guarantee the Arco station ,artificial light ,and all the other questionable issues are a breath of fresh air compared to China .
      Sorry,I just picked up a copy of one of the local papers and it has a whole insert about diversity the problem I had after reading it was ....Diversity ? What diversity !
      It looked and read more like a pander and propaganda insert .
      Just my opinion.

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  7. There goes the McMansion boom.

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    1. And here comes the McMansion clearance sale?

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    2. McMansions, once all the crap confections are peeled off, could be turned into multi-unit housing.

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  8. Hey, Mod! I traced yesterday's caravan graphic back to a blog out of San Luis Obispo and was rewarded with a site somewhat reminescent of your own, "the movement.com". An enlightened, extremely diverse individual with a social conscious writing about his town, his life, and bringing forth stories of architecture as art that were just delightful. Thanks!

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  9. That with the new investor visa regulation might save Sierra Madre.

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  10. This is an awesome article today, John Crawford.....subject we should watch with keen interest. The Chinese are getting ripped off world wide, paying way too huge prices for property and oil, resource rights all over the world, deals that border on scams!!!!!
    Canada has been fleecing them for years! Our turn? Probably.

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    1. If the Chinese housing bubble bursts there won't be much left to rip off. Though I supposed Chinese nationals being forced to sell upside down housing here in the US could be interpreted that way.

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    2. They pay all cash. No mortgage. No upside down. Also the money is ours that we used to buy everything from them. B. G

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    3. That's capitalism

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    4. No, that is a totalitarian state that pays its people slave wages. Only you would think that is capitalism.

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  11. What this article implies is that this is a criminal scam. Wouldn't be the first time we've seen a criminal scam involving China in California. Bart Doyle comes to mind? Bart? Still around????

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  12. Pop go the weasels.

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  13. You got yours didn't ya' Sparky....

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    Replies
    1. I guess you didn't. Does that make you a chimp-ponzi?

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  14. Years ago I realtor in Arcadia said people were showing up from Hong Kong just before British turned it over to the Communists, with suitcases full of cash. Said buy a house. Any house, sight unseen in Sierra Madre, AS SOON AS SIERRA MADRE SWITCHES SCHOOL DISTRICT FROM PASADENA TO ARCADIA.

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    Replies
    1. Well they don't care abou that anymore. And isn't the new middle school going to have a Mandarin immersion program?

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  15. Don't forget our graveyard!

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    Replies
    1. We'll just remove the beloved and enshrine them in basements .

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