When the Chinese Bubble bursts so will the Central London one

brit1234

Beijing must avoid giant pop in house prices

By Jamil Anderlini in Beijing
Published: June 5 2011 17:14 | Last updated: June 5 2011 17:14

Everyone knows that when you start getting stock tips from your shoeshine boy it’s time to short the market. But what about when your Beijing taxi driver tells you which apartment complexes to sink your life savings into?

Deciding whether or not the Chinese real estate market – referred to by hedge fund investor Jim Chanos as “Dubai times 1,000 or worse” – is a giant bubble or not is probably one of the most important questions in the world today.

Not only does Chinese growth depend on house building: the fates of many other economies, particularly commodity exporters such as Brazil and Australia, also depend on demand from the world’s second largest economy.

It is also important from a geopolitical perspective.

Housing construction is such a driver of the Chinese economy that if a real estate bubble were to burst the resulting shock could see economic growth fall to the low single digits. By the Communist party’s reckoning, the economy must grow more than 7-8 per cent a year if social unrest and demands for real political representation are to be kept under control.

China’s newly minted middle class might not be so willing to accept authoritarian, one party rule if they saw the value of their shiny new apartments and villas collapse as a result of the party mismanaging the economy into a giant property bubble.

So is there a bubble in the Chinese property market or not?

Forests of empty or half built apartment complexes across the country would suggest there is. But, unfortunately, the smartest people I talk to do not agree. Some say there is a huge bubble, some say there is no bubble and some say even if there is a bubble it will never pop.

For those who define a bubble as a rapid increase in leverage to support speculation in rising asset prices, China’s real estate market does not fit the mould.

The ratio of household debt to disposable income in China was only about 45 per cent in 2010, less than the US in 1960 when the ratio was 55 per cent and nowhere near the 130 per cent level reached at the height of the US property bubble in 2007, according to figures from brokerage firm CLSA.

But if you define a bubble as a fundamental mismatch between prices and the underlying value of an asset, then Chinese real estate has to be a prime candidate.

On the outskirts of Beijing, near the airport, there are dozens of gated villa communities with names like Palm Beach, Cathay View, Le Leman Lake and Maison De Bourbon.

Despite their grandiose names, even the nicest of these developments resembles a nondescript outer suburb of Houston or Las Vegas. Many are shoddily built and poorly insulated, with a tiny strip of dirt for a backyard and the side of a neighbour’s house for a view.

But the going rate for a decent Beijing villa is about Rmb40m ($6m), enough to buy a nice London mansion or a luxury apartment in Manhattan.
With about 30 similar new developments under construction in the vicinity and empty farmland for miles around, it is hard to argue that these prices are sustainable.

Beijing luxury villas are an extreme example and don’t represent the entire market but in many cities across the country average house prices are more than 10 times average annual household incomes. Prices of about three times average annual incomes are considered normal in developed economies and prices of five to seven times are more common in other Asian economies.

China property bulls argue that official figures significantly understate real incomes by not including so-called “grey income” – bribes, kickbacks and tax evasion scams that do not show up in official data and could equate to a quarter of reported incomes by some estimates.

The optimists also argue that crazy high prices are supported by government compensation given to households living in the countless inner-city buildings that are being demolished for redevelopment across the country. These handouts allow relocated households to afford far higher prices for their new apartments than their income would suggest.

That is why Beijing and other large cities are full of drivers and blue collar workers on salaries of Rmb2,500 per month who are millionaires on paper because of the rise in the value of apartments they received as compensation for their demolished homes.

But even the most bullish bubble deniers admit that housing prices are too high in China and are unsustainable at current levels over the long term. The question is, given what’s at stake for China, the Communist party and the global economy, will Beijing be able to bring prices down gradually without provoking a giant pop?

http://www.ft.com/cms/s/0/f4afb162-8f8a-11e0-954d-00144feab49a.html#axzz1OQgUdbX6

Now with central London being bought by 60% Asians mainly Chinese I believe the London bubble will pop when the chinese one does.

I also believe it will be yet another huge economic hurricane which will hit the world.

STing

The Chinese have a huge impact on house prices. Cheap chinese products have kept inflation low. Low inflation allowed house prices to climb to todays levels.

Now they (the Chinese) are beginning to export inflation, this will decrease disposable income, increase the chance of rate rises and ultimately hit the UK's house prices hard.

brit1234

There is a lot of pressure on wage inflation there, so good costs will rise a lot if we keep the pound weak. There is hardly anything not made in china now, so that is a giant source of inflation.

DervProf

STing wrote: »

The Chinese have a huge impact on house prices. Cheap chinese products have kept inflation low.

Only because the "basket of goods" that was used to determine inflation had a large amount of Chinese goods in it. All that needs to be done is to remove those Chinese goods when they go up in price and bingo ! Low inflation !


And a not very full basket.


Oops !

Cleaver

brit1234 wrote: »

Now with central London being bought by 60% Asians mainly Chinese I believe the London bubble will pop when the chinese one does. I also believe it will be yet another huge economic hurricane which will hit the world.

You may well be correct. I'm sure you'll fully understand if we take your predictions with a pinch of salt though considering your track record?

HAMISH_MCTAVISH

House Prices
Land Registry: -1.1% MOM, -2.3% YOY
Halifax: -1.4% MOM, -3.7% YOY
Nationwide: +0.3% MOM, -1.2% YOY

Hiya Brit....

You seem to have forgotten to update the Land Registry.

julieq

May have mentioned this a few months ago, but nice you've caught up Brit.

julieq

Just to make this point again, there are significant risks to the West from the Chinese property bubble, which is a classic bubble (no supply constraints at all, money being made apparently easily simply by trading futures in off plan developments).

The risks aren't simply in the bubble bursting, which is inevitable, it's in what happens as the banks attempt to rein in the situation now by reducing lending. This hurts the cashflow of Chinese manufacturers and puts inflation up for us, since they can only react by increasing prices. This is already having a braking effect on the recovery which is becoming apparent over the past 3 months or so following a quite strong bounceback.

The bubble bursting is more difficult to predict, but essentially you can see a potential devaluation of Chinese currency and therefore potentially some deflationary effects - unfortunately many supply deals are priced in $US though - but the issue is that a great deal of our capital has gone into China, and this is likely to be lost. China is less likely to act to support foreign investors and may take aggressive actions. So you can predict a very widespread stock market crash in the West as value is lost from multinationals.

You can also see it being necessary to convert assets into cash, and this essentially means that the gold the Chinese like to buy floods back onto the market. Good luck, PM nuts (though PM nuts never lose money, they always KNOW).

It's a really dangerous situation for everyone. What amuses me is that given there is a thermonuclear timebomb sitting in the East, ticking away happily, the bears ignoring concentrate on marginal government subsidies, modest interest rate rises and so on as a mechanism for reducing house prices here. It's terribly parochial.

chewmylegoff

Whatever properties the Chinese are buying in Central London, I doubt they are buying up many 2 bed flats in west London so I doubt the withdrawal of Chinese investment cash, if it happens, will do much to help you Brit.

There aren't many clear figures on it, but the land registry suggests the London property Market is turning over 35,000,000,000 per annum. The only links I can find suggest about 700,000,000 invested from Asia, about half from china, so that's 350,000,000 or roughly 1% of the total market, probably concentrated into prime central London. My maths could be a load of old carp though as it's still early on a Monday and I haven't really bothered to check it.

tartanterra

brit1234 wrote: »

Now with central London being bought by 60% Asians mainly Chinese I believe the London bubble will pop when the chinese one does.

Can you please provide the source for these figures.

Otherwise, it just look's like you are making stuff up, and therefore have no credibility...............

Poshbird

The fact that China will have a housing crash is not in doubt much, it will happen. Its a matter of debate the effect this will have on the rest of the world.