Wednesday, March 6, 2013

60 minutes, China's Property Bubble & Reality

Although I didn't record it, last Sunday night 60 minutes had a bit on the Chinese property bubble that makes your head spin.  I first became aware of the "real estate bubble" in China 5 years ago, but again market phenomena can outlast almost any prediction.  A convergence of events make this bubble a necessity and a tragedy.

A necessity because although the median Chinese is poor, there is a growing middle class, and in a country of 1.2 billion the law of large numbers applies.  First, most of the properties have been bought.  Developer need the capital from investors to ensure that they can afford to build their projects (a fundamental aspect of the Chinese financial system).  These apartments are kept empty, because in China a "used" apartment is not worth as much as a new apartment.  

Second, Chinese investors have limited scope for deploying capital (as was explained in the report) no foreign investments allowed, limited or no return on bank investments, and a "ponzi" quality to a good chunk of the domestic bond market.  

Thirdly, over the past 20 years real estate investment has been a real winner, generating massive profits for the investors that played the game.  If its worked for the past 20 years why not now!

The situation 5 years ago was that China has more than 60 million empty apartments (built but with no electricity meter).  that's equivalent to nearly half of America's entire housing stock.  More troubling these empty apartments were in the $60 -- $100 K zone.  Not really the thing for the average Chinese worker that ears maybe $5 K per annum.  So not only is there an overhang in terms of available properties, but there is a tremendous missmatch in terms of the type of dwelling available.

There has been lots of pressure to stop this mad development, but at the same time there's been lots of pressure for it to continue.  First, there are the states and local government which depend almost entirely on land sale to generate revenues.  Then the reality of China's economic policy is to encourage investment... whatever that may be.  So they don't like the consequence, but that's the law -- that of unintended consequence.

The question is the same in the US, Spain and China.  Can the housing built be absorbed.  The news looks OK in the States (although it's not over yet), Spain is in deep trouble and China, well that's just a different scale!


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