Skip to main content

Too strange: real estate in China

Several years ago (2003) the inner-mongolian city of Ordos decided to build a new city for one million people.  Until recently Ordos was a building site, despite the fact that most of the city that has been built was a ghost city -- amazingly enough despite this city having a capacity of nearly a million, no more than 50,000 people living there.

Surprisingly, real estate prices in Ordos are only now beginning to fall, to the despair of the owners (20 to 30%).  For nearly 10 years the city of Ordos has been empty, these property generated no income for the owners and despite this, property prices remained high.  

There are some Chinese peculiarities, first off, Chinese home buyer will pay a premium for a brand new home (for some reason they think its like a new car), so speculators buy real estate and keep them empty -- waiting for prices to rise, and not relying on rental income.  Hence, China probably has more than 65 million empty homes -- to give an order of proportion, in America there are approximately 120 million households... 

Nevertheless, there was never any reason to build Ordos, it is far from everything, in an area of China that has low population density (relatively speaking).  Now building of new apartments has come to a halt, as buyers are getting scarce,  Check the video here

Moreover, the city has been built on debt (including a spectacular museum) that will never be repaid.  Like all bubble, the Chinese real estate sector is built on trust and hope.  Once investors figure out that there is simply no demand for the apartments they own, they will begin to liquidate.  Investors are still (today) working on the idea that the market will quickly recover.  There are stories of investors protesting at the office of real estate developers because of price cuts, while at the same time calling their friends to come and buy an apartment at the new low price.

That's why so many investors are concerned about China's banking sector.  It is easy to forget that the 2002 banking bust (where the government created good/bad bank structures) has still not been resolved -- really!  This will be interesting


IDX Website said…
Another informative blog… Thank you for sharing it… Best of luck for further endeavor too.

Popular posts from this blog

Trucker shortage? No a plan to allow driverless rigs

There are still articles on how America is running out of truckers -- and that its a huge problem, except its not a problem, if it was a problem salaries would rise to so that demand would clear. Trucking is one of those industry where the vast majority of participants are owner/operators and therefore free agents.

Salaries and cost are extremely well know, "industry" complains that there are not enough truckers, yet wages continue to fall... Therefore there are still too many truckers around, for if there was a shortage of supply prices would rise, and they don't.

What there is though is something different; there is a push to allow automatic rigs to "operate across the US", so to encourage the various authorities to allow self driving rigs you talk shortage and hope that politicians decided that "Well if people don't want to work, lets get robots to do the work" or words to that effect.

This has nothing to do with shortage of drivers, but every…

Every punter says oil prices are on the rise: Oil hits $48/bbl -- lowest since September 2016

What the hell?

How could this be, punters, advisors, investment bankers all agreed commodity prices  in general and oil prices in particular are on the rise...its a brave new era for producers and exporters -- finally the world is back and demand is going through the roof, except not so much!

What happened?  Well energy is complicated, the world operates in a balance -- 30 days of physical reserves is about all we've got (seriously) this is a just in time business.  So the long term trend always gets hit by short term variations.

Global production over the past 12 months has risen by somewhat less than 1.5% per annum.  As the world market changes production becomes less energy intensive (maybe), but the reality is that the world is growing more slowly -- America Q4 GDP growth was around 1.9% (annualized) Europe is going nowhere fast (the GDP growth in Germany is overshadowed by the lack of growth in France, Italy, Spain (lets say 27 Euro members generated a total GDP growth of 1.2…

Paying for research

This morning I was reading that CLSA -- since 2013 proudly owned by CITIC -- was shutting down its American equity research department -- 90 people will be affected!

Now the value of a lot of research is limited, that is not to say that all research is bad. In fact, I remember that GS's Asia Aerospace research was considered the bible for the sector.  Granted, there was little you could do with the research since the "buy" was for Chinese airlines...that were state owned.  Still it was a vey valuable tool in understanding the local dynamics.  It seems that the US has introduced new legislation that forces brokers to "sell" their research services!  Figures of $10,000 an hour have been mentioned...

Now, research can be sold many times; if GS has 5000/6000 clients they may sell the same research 300x or 400x (I exaggerate) but this is the key -- Those who buy the research are, I presume, prohibited from giving it away or selling it, at the same time the same rese…