Real Estate in China is (a) Stable (b) Turning Up or (c) Ready to Pop

Friday, September 11, 2009 0:10
Posted in category Uncategorized

China Real estate

The recent UBS report, China Question of the Week: Is The Property Sector Recovery Losing Its Steam? (email me for copy), attempts to address a concern many have in China.  Whether or not we are seeing the top… or bottom.. of the market.

It is a report that, true toUBS form, is very upbeat:

Based on the nation-wide data for August, the property sector recovery is actually gathering momentum. Both sales and new starts rose very strongly y/y, and land development grew for the first time in one year. The strong growth numbers are not just a result of the base effect, as some of the seasonally adjusted figures are at record highs. Some of the recent anecdotal reports about dropping sales may not have taken into account of seasonality and/or captured the overall activity level in the property sector

But for me, it is the chart above that really says it all…. 3 previous bubbles.. one being created.

.. and if I were to chose one area where I disagree with the analysis, or at the minimum hoope to see more support for, is the fact that sales in China do not mean demand. That many buildings are “bought” as an investment, and in times where rentals are soft (i.e. right now), that returns for investors go negative… which pushes them back to equities… which inflates the equity market (a market some already believe is overinflated as well)…

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11 Responses to “Real Estate in China is (a) Stable (b) Turning Up or (c) Ready to Pop”

  1. chinatells says:

    September 11th, 2009 at 3:26 am

    I agree – the sign of bubble is obvious – the UBS research sounds like some one who is long wants to liquidate,,,..(

  2. Emil says:

    September 11th, 2009 at 8:12 am

    I would say we are heading into a stable period.

    The price increase in recent months has very much been policy driven. A combination of loose lending policy and beneficial tax policy. The UBS report does not mention the beneficial tax and interest rate discount policy created about a year back to release pent up demand, this policy is set to expire end of the year – I believe this is an important key to understanding Market sentiment right now, here is how I see it:

    The policy has been effective at getting potential homeowners who were in wait and see mode in 2008 to buy earlier this year. The price hike this summer and speculation in a W shaped Market recovery may have put some buyers back into wait-and-see mode, these will be itching to buy before the tax policy run out in December, so a small hike is possible – however I do not think there is much demand here to drive prices up.

    Investors who caught the wave and have seen their property go up in recent months will be looking to cash out on the demand from buyers itching to buy before the policy run out. Alternatively they will hold on to the property they got with beneficial mortgage rates. The tighthening of monetary policy and relatively more attractive equity market will probably mean that there is not much demand from new investors looking to enter the market. Your point about soft rentals driving investors to sell is valid, but I believe the majority of Chinese investors are looking to profit from flipping the property and in some cases do not even intend to hold it long enough to bother spending the money on decoration needed to rent out their property.

    The end of current policy will create a small rush driving demands the next three months, but not much of a boom as wait-and-see buyers are unlikely to drive prices up.

    The policy puts equal pressure on sellers to flip before end of the year, however I do not see prices going down. After years of bubling there is certainly room for a big bust, also bigger than what was seen in 2008. Prices are still much higher than their fundamental value (measured by developed market standards), however the Chinese Market is surprisingly resilliant and I believe it will take a much bleaker outlook than the current to start a big selloff.

  3. Rich says:

    September 11th, 2009 at 9:16 am

    hi Emil

    Thanks for the comment.

    Honestly, when reading your post I am jsut seeing a repeat of 3 years ago when people said much the same, but in my view the policy changes were not meant to release pent up demand.. it was meant to drive speculative liquidity into the market.

    Take a drive through the majority of first and second tier, and this becomes evident as the majority of the new buildings are not city center. Were they city center, then the argument for demand could be made, but outside the “tofu”, and it is a different story.

    Where I think this gets interesting though, is not on the sale side. It will be on the buy side when buyers stop buying, and developers/ policy makers are looking for the next solution. To promote selling an apartment to upgrade will drive prices down, but to further lubricate the market would add more volatility

    .. an interesting position.

  4. Rich says:

    September 11th, 2009 at 11:49 pm

    Jsut came across this article at China Stakes Cash Rich SOEs Pushing Real Estate Bubble Ever Higher … interesting….

    Since May, real estate enterprises with central enterprise background, and even non real estate firms, have begun to enclose lands, resulting in big changes in the land market. The increasing land prices are leading to skyrocketing housing prices and attracting official attention.

    The National Audit Office data shows that 25 central ministries are involved in real estate violations, worth billions of yuan. Among them, unlisted assets of 51.6917 million yuan from the Ministry of Foreign Affairs have gone into purchasing real estate. The Ministry of Agriculture has developed commercial housing, acting beyond its authority, and has submitted false reports on housing subsidies. In 2008, a real estate rental service center under the Ministry of Finance took in rental income of 5.3193 million yuan. The Ministry of Public Security has approved construction projects worth 422 million yuan, utterly exceeding its authority. Other data show that among 136 central enterprises under the State-owned Assets Supervision Administration Commission, about 70% of the companies are involved in real estate, among which 16 firms are primarily based in the property industry, including Poly, Sino-Ocean, and China Resources, while more than 80 outside firms have business in real estate. Among the top ten highest priced land purchases in major cities in the first half of this year, 60% were gobbled up by SOEs.

  5. bill j says:

    September 12th, 2009 at 10:35 am

    I reckon the UBS lot have been pretty spot on vis China through the course of the crisis.
    It was their work which disputed the conventional wisdom that China was extremely dependent on foreign exports. They were right.
    They pointed to the impact of the re-flation early on. They were right.
    They’ve now demonstrated how that re-flation is lifting private investment too. I think they’re right again.

  6. Rich says:

    September 12th, 2009 at 11:22 pm


    Thanks for the comments, but I am not sure I agree.

    On the re-flation areas, UBS has been with the majority of the pack on that one (not overly optimistic or pessimistic in analysis), so they have been on track there.

    But on the export – I think they were flat wrong. That it is only the Chinese stimulus package that creates the illusion that China is growing, and this growth is only coming in certain sectors – sectors that do not include the manufacturing market.

    Michael Pettis’s recent article sums it up best when talking about the recent data that has come out, and in my mind there is no one in the game right now more knowledgeable, more experienced, or closer to the ground on these numbers.

    If the purpose of the stimulus package was solely to protect China from the immediate employment impact of the global contraction in demand, it has been an almost unqualified success.

    But if at least part of the goal was to help China shift its unbalanced growth model to one less reliant on foreign, and especially American, consumers, it is not clear that any progress has been made. In fact to the extent that a significant share of new investment has been wasted, it may actually make future imbalances worse.

    China’s response to the global crisis needs to be seen as a two-part process. The first part is to goose economic growth in response to the rapid deterioration in the external environment. The second part is to rebalance the economy away from its excess reliance on investment and foreign demand. The August data seem to confirm that China is very successfully managing the first part. Whether it has made any progress on the second part is still very much open to question.

    At the end of the day, I will agree that China did spend their way out of the worst of this downturn, and in that sense they were able to successfully decouple themselves from the wider global economy, but to date we have no visibility on whether this money was spent wisely.. or in a manner that just made the statistics look good.

    … and no one has even started to look at the impact that this stimulus will have going forward as China looks to overhaul its social sectors.

  7. bill j says:

    September 13th, 2009 at 9:50 am

    Well there’s no arguing that Michael Pettis is well informed, but in my view he over emphasises unproductive consumption, what you might call consumer purchases, cars, clothes etc. as opposed to productive consumption, i.e. investment in roads, housing, dams, nuclear power and so on.

    This type of infrastructural investment, much needed still in China today, has never guaranteed a return in its own right, in that sense you could say that it was not money wisely spent, but what it does do is develop the pre-conditions for accumulation on a far wider scale than that of the infrastructure itself.

    Judging by pretty much all of the indicators, particularly for profitability, it has been very successful in that respect over the last decade in particular, and given the recovery of profit rates since the turn of the year, has also succeeded in the short term too.

    Will it guarantee that China continues to grow forever? Of course it won’t. Will it mean that future bubbles will not develop? Not at all. But has it dragged China out of a possible slump in the short term and has it laid the basis for further profitable growth at least for the next few years, I think almost certainly yes.
    On the separate issue of GDP/exports I still think that UBS estimates, adjusted for imports and value added, putting its contribution at around 10-15% of GDP have been essentially vindicated by the course of events this year.

  8. Rich says:

    September 13th, 2009 at 10:02 am


    I would agree that investments in infrastructure are investments for the future, and their returns are equally unappreciated in the near term. My question related to these investments is not necessarily their short term (i.e people working, materials moving, services rendered), but over the long term (i.e. will these roads be used).

    I would also agree that these investments have contributed from China dodging a bullet… but, should we see a round 2 (i.e. commercial property sector in US crash or asset market(s) in China crash), I am not confident that building more roads would be enough.

    Which I guess brings me to my major issue with UBS’s analysis of this particular issue. The timelines are too short, and are done so to frame the picture they want investors to see. Were the timelines lengthened (on both sides), the picture would be different, the risk assessment higher, and perhaps then we would get a better idea of the various moving pieces…


  9. Alex says:

    September 13th, 2009 at 7:01 pm

    a) But with clarification and not as a general case.

    1. Regional markets.
    2. Housing stock under development.
    3. Demand.
    4. Demand-policy response.

    1. Regional markets.

    At a recent housing fair I was approached about buying property in a regional city of around 1mn, the price was around 3000 Yuan/m2, but it was not possible to borrow for this purchase as my employer was not local in this area. A quick back-of-the-envelope calculation showed I’d have to shell out an approximate amount of cash for a nicer place in the much nicer 2nd tier city I’m currently based in (and can borrow to buy with). Inter-region speculation for those with access to credit locally (common) but not inter-regionally (unusual) is limited; perhaps there is a limit on funds flowing between regions (limits on long range commuter transportation, risk aversion, rental differentials re-enforce this).

    What’s true in one region isn’t necessarily true in another.

    2. Housing stock under development.

    Pretty well publicised that the supply line of new properties has thinned in most regions with increased sales over the past few months, consistent with your charts. That acts to support prices despite a recent uptick. Doing a visual integral on your Chart 3 suggests that since 2007 starts have been around 10% overall. Adjusting for base effects slows the rate down considerably. I would expect considerable volatility of prices while the current stock remains thin and new stock comes online – again very dependent on regional specifics.

    3. No interest in guessing demand.

    4. Demand-policy response.

    Breaking down demand is interesting. I do not expect negative equity to be a major problem in most of China’s for a majority of single or double (i.e. bought for offspring) property owners. The home ownership segment of China’s population is too large to anger. A stock market crash did have a wealth effect on some, but a major Chinese savings bank would never be allowed to fail and for so many to loose their savings – a property market crash may affect some who speculate or over-leverage, but will not be allowed to affect the laobanxing. China also has a very thin second-hand property market compared to other countries for any market segments that aren’t sales of speculative sales and the largest cities.

    An addition (to a very long comment): I’m curious what the effect of car purchase will have on Chinese consumers’ appreciation of depreciation. Cars tend to depreciate rapidly and wear out after a decade (and become unusable outside that given traffic growth in what were uncongested 2nd and 3rd tier cities). I’m curious how that will affect investment mentality regarding asset purchase (i.e. “I should have put down a deposit on a house with that 150,000 rather than buy that car.”)

  10. Anders says:

    September 14th, 2009 at 9:14 am

    The Chinese raising M2 should make anyone very cautious about predicting a stabil ride for the real estate market or any other market.We have not seen a raise in the M2 like this in a long long time.

    BOP “At end-July 2009, broad money (M2) stood at RMB57.3 trillion, increasing 28.42% year on year, up 10.6 percentage points from the end of last year”

    The bet on infrastructure is a bet on a future increase in manufacturing and more advanced agricultural products. The problem is a road/railroad/dam in the Western parts of China doesn’t benefit the product innovation in the eastern cities. Empty high-priced housing in the large cities doesn’t help the Chinese consumer to spend more and buy more goods, so the foundation for absorbing a future increase in manufacturing can be laid.
    The question is what happens when the M2 raise flats out (and it will).
    China will properly faces a few scenarios:

    1) A full US and EU recovery with their consumers able to absorbe Chinese goods as before and Chinese consumers can absorbe the additional capacity created under the stimulus package.

    2) A slow US and EU recovery with raising savings rates and western consumers unable to absorbe Chinese goods as before, but with an extreme rise in spending from both the Chinese goverment and it’s consumers, that will absorbe all extra capacity present and future.

    3) A slow US and EU recovery, An extreme rise in spending from the Chinese goverment that will last as long as it needed (2012 – 2013?), but with no help from the local consumer.

    In the end the Chinese real estate market depends on one of these 3 I think. What Pettis and Xie are saying is that, if the 3. scenario happens, then there is problem, because cannot grow without its own consumers. And the next generation of growth in China is not going to come from a new railway line in Gansu or a freeway in Yunnan. China has reached the market shares it can get from low cost production. Growth is now going to come from hightech parks around the eastern cities or from private entrepreneurs in southern China. The ones that are missing out on the stimulus package? all the while money are flowing into new housing, cars, stocks, roads and railways.

  11. Alex says:

    September 15th, 2009 at 2:35 am

    @Anders I think M2 is interesting, but where the counterparts to M2 are are even more interesting.