Why China's Housing Bubble is Causing Violent Protests

Yossif's picture
Rank: Senior Orangutan | 422

Chinese cities have the highest home prices in the world! The home-price/income ratio of Shenzhen, Honk Kong, Beijing, and Shanghai, with 44.4, 36.2, 33.8, and 32.6 are higher than that of London's 27.8, whilst Guangzhou with 25.1 is higher than NY's 12.1. The y/y home price growth rate in 70 Chinese cities increased to 10% this year. Consequently, China has increased mortgage rates, requires at least a 30% downpayment, and has put limits on buying multiple apartments.

Regardless, the measures China is taking to minimise the housing bubble have massively backfired: not only did prices go up as a result of an anticipated increase in restrictions, but protesters are clashing with the police in the streets. This is extremely rare in China.

Videos circulating on social media showed protesters clashing with police and some being dragged away--unrest highly unwelcome in a year of a major Communist Party conclave expected to consolidate Mr. Xi's power. Shanghai promptly eased some restrictions on developers and buyers.

- WSJ

China, with debt being 164% of GDP, is in big trouble if it can't stop this housing bubble from growing. If it does grow and it pops, repercussions due to defaults could be felt all over the world.

How can the Chinese government find other ways to control the housing market? Are these perhaps, merely growing pains, as China is weaning itself off of it's reliance on asset bubbles for growth? Or, is this problem unstoppable and will we soon all be bearing the consequences?

Region: 
Other APAC
China
United Kingdom

Comments (29)

Dec 31, 1969

Let me get this straight... real estate development increased because of an increased demand for somewhere to park money combined with the cheap credit to do so? I'm surprised this is going to end poorly, lol.

Dec 31, 1969
FrankD'anconia:

Let me get this straight... real estate development increased because of an increased demand for somewhere to park money combined with the cheap credit to do so? I'm surprised this is going to end poorly, lol.

lol Malinvestment...malinvestment everywhere. Somewhere, Hayek is smiling.

Please don't quote Patrick Bateman.

Dec 31, 1969

#BadRuck

nice hashtag

My drinkin' problem left today, she packed up all her bags and walked away.

Dec 31, 1969

Property prices rising due to cheap credit, I wonder what will happen when rates rise. Well its a good thing we live in America where we don't have this problem...

Dec 31, 1969

Follow up article on CNBC today:
http://www.cnbc.com/id/100532907

Dec 31, 1969
talkaboutit:

Follow up article on CNBC today:
http://www.cnbc.com/id/100532907[/quote]

Nice share. thx

Please don't quote Patrick Bateman.

Dec 31, 1969

That is exactly the opposite of why it was built (in china).
The ghost cities and large-scale developments in the residential and retail sector where initiated due to an excess in capital and few options where to place it, ergo supply drived development. A typical example of "build it and they will come"-gone-wrong!

Finland on the other hand has a fairly demand-driven development market, as do all the nordics.

CRE NERD

Dec 31, 1969

Probably the worst interview wang shi has ever done. But this video is misleading on many levels, so he just said what some plp want to hear.

The Auto Show

Dec 31, 1969
huanleshalemei:

Probably the worst interview wang shi has ever done. But this video is misleading on many levels, so he just said what some plp want to hear.

Care to elaborate?

Please don't quote Patrick Bateman.

Dec 31, 1969
huanleshalemei:

so he just said what some plp want to hear.

So a real estate bubble is what people want to hear?

Dec 31, 1969

The market is government-driven. Now the government restricts the number of hourses per family can buy, the loans banks can lend to developers, and collects higher property taxes, etc. The 'ghost cities' will change in no time if the government chooses to loosen up. Plus wang shi always has a headline obsession.

The Auto Show

Dec 31, 1969
huanleshalemei:

The market is government-driven. Now the government restricts the number of hourses per family can buy, the loans banks can lend to developers, and collects higher property taxes, etc. The 'ghost cities' will change in no time if the government chooses to loosen up. Plus wang shi always has a headline obsession.

Correct me if I'm wrong, but aren't those "ghost cities" already owned by people but just not inhibited because they were purely bought as a place to put money? How would allowing people to buy even MORE houses fix that?

Dec 31, 1969

I think that it is a bit less risky than most people think.

For your average Chinese person...there are three places where you can park your cash...the shady stock market (corp governance has a long way to go), "Trust" products (opaque financial instruments via shadow banking), or real estate.

China's shadow banking sector is the most scary IMHO, and could be the trigger of the next big collapse.

Please don't quote Patrick Bateman.

Dec 31, 1969

Yeah, I think it sounds a lot worse than what it is when taking into account other economic and cultural factors (not that I'm an expert, just based off what I read).

What goes on with their trust products? Any link you have available to look at?

Dec 31, 1969

I was wondering about this myself. Specifically in the debt arena. How do you think the opportunity will prevent itself?

Dec 31, 1969

I wouldn't trust their paper, ever.

I remember recently reading about a real estate developer who used the same building as collateral on three separate loans, these institutions had no idea and found out when they went in to collect after he defaulted... Only to find out he had already sold the building to someone else.

There really is no telling how bad it will get with their real estate bubble and shadow banking.

Dec 31, 1969
ArcherVice:

I wouldn't trust their paper, ever.

I remember recently reading about a real estate developer who used the same building as collateral on three separate loans, these institutions had no idea and found out when they went in to collect after he defaulted... Only to find out he had already sold the building to someone else.

There really is no telling how bad it will get with their real estate bubble and shadow banking.

Wasn't the article referring to a shipping firm that used the same bundle of commodities for 3 separate loans? Or was this another corrupt firm?

Dec 31, 1969

Another corrupt firm.

Also heard about a guy that brought in a shipment of gold, verified it was real when it shipped. Landed in China, he didn't check it in port and waited until delivery to the warehouse to check. Somewhere in between landing in China and getting to the warehouse it was swapped out for tungsten coated in gold foil.

These stories are endless.

Dec 31, 1969

The so-called "housing bubble" in China is really not a bubble at all. There are pockets of speculative activity and oversupply in select Chinese cities, particularly smaller, wealthy export boomtowns on the eastern seaboard, but generally speaking there's not a major problem. The demand is there. The urbanization story is real. Investment options are limited. There is not substantial leverage in the market when compared to developed markets before their crisis. While valuations are high relative to current incomes, current incomes are higher than reported and growing annually at double digit rates (unheard of in almost any other country, but something that happens consistently in China)... There are pockets of oversupply and there are dumb investments outside of cities in places that won't be developed for a long time. But overall, if you're looking at quality urban housing in a major city, prices will continue to go up over the medium to long term, even if there is a correction (which there may be).

Almost everyone who writes about this topic knows nothing about it.

Dec 31, 1969
International Pymp:

The so-called "housing bubble" in China is really not a bubble at all. There are pockets of speculative activity and oversupply in select Chinese cities, particularly smaller, wealthy export boomtowns on the eastern seaboard, but generally speaking there's not a major problem. The demand is there. The urbanization story is real. Investment options are limited. There is not substantial leverage in the market when compared to developed markets before their crisis. While valuations are high relative to current incomes, current incomes are higher than reported and growing annually at double digit rates (unheard of in almost any other country, but something that happens consistently in China)... There are pockets of oversupply and there are dumb investments outside of cities in places that won't be developed for a long time. But overall, if you're looking at quality urban housing in a major city, prices will continue to go up over the medium to long term, even if there is a correction (which there may be).

Almost everyone who writes about this topic knows nothing about it.

Kudos. It is nice to hear from someone who is actually actively doing deals there.
Much has been said about the "ghost cities" in China and even 60 Minutes did a segment on that. I think those who bought into the outlaying areas are indeed likely in for a rude awakening but the CBDs and established population centers with lots of economic activities and foot traffic should come out just fine. This is analogous to the aftermath of the U.S housing collapse where many suburban and exurban new developments got decimated while core CBDs like Manhattan, SF, Boston and many other downtown CBD areas remained stable.

One thing I have been noticing, however, is that in so far as residential developments in China are heavily dependent on pre-sales and as the banks have been tightening mortgages for new home buyers, this is having an impact on the paces of pre-sales. So in the short term at least many good viable projects may nonetheless need temporary extensions and refinancings on their loans. Since their LTVs are much lower than the U.S counterparts leading up to the housing crisis, the sponsors and their lenders do have considerable more flexibility re how to structure these.
I wonder how is this capital dislinkage is affecting the many hundreds of millions of RMBs worth of RE loans funneled through the trust products.

Re Dingdong08's point about downside protections for foreign investors given the legal uncertainty, that is a very valid concern. You do not want to just lend money to some WFOE set up by a Mainland guy in HK, even if it is secured by onshore assets on paper, as the borrower can move assets to another unrelated entity without your knowledge, and before you know it, you are left with an empty shell. The same can also probably be said of all the foreigners that bought offshore bonds (e.g. the dim sum bonds) issued by Mainland companies, as the investors of Suntech convertible bonds found out last year.

Most of them are probably better off not dealing with the locals directly. Instead, there are a number of active offshore investors with extensive ground operations run by local, Chinese speaking staff (many of whom studied and worked in the West before returning) who structure their deals along more unorthodox ways that grant them operational controls of the collateral .
If you are a U.S megafund or principal investing arm of a BB wanting to get into the Chinese credit and RE financing space (and many of them have been very eager to do so due to the lack of good yield opportunities in the U.S and now Europe), you are definitely better off dealing with these institutions instead. This is the approach that GS and others are now taking after they all lost money buying into Chinese NPLs directly.

Re funky food in China, you are not obligated to eat what the hosts offer you. Plus you can always say you are Jewish. God Bless the Chosen People.

Dec 31, 1969

I could see a bubble over there. I haven't been over in a couple of years but we were raising some capital from the stereotypical Chinese billionaire who built the stereotypical Chinese vertically integrated company involving industries that had absolutely nothing to do with each other, one of which was real estate development. Because we were the western finance guys he wanted us to take a look at some of his real estate deals and see if we could help him to get low cost western debt into them. The valuations they were talking about for the real estate were outlandish. More than 5th Avenue street level retail per SF for everything but people were willing to pay those prices. I just think it comes down to the greater fool's theory of who gets left holding those assets when no one else is willing to buy them. However, I don't think it's going to tank the world's economy because the Chinese government will do anything it can to protect the country's economy and growth because if the citizenry doesn't buy into the consistent growth story and the belief that their lives can be better, there's no reason to keep a dictatorial government in place and revolution becomes a possibility. And that would be really bad for the world's economy.

The market in general there, and not just real estate, is also very different. Leverage isn't very high because it's tough to borrow money and amongst the wealthy having to borrow money is a sign of weakness so a lot of things are pure equity plays, at least from what I've experienced. And it's very difficult to bring in non-PRC debt because foreigners can't lien and foreclose on property so even if you could bring in 5% debt from HK (vs. double digit PRC debt), you have to jump through all of these weird hoops involving domestic banks issuing letters of credit because the official stance is that you can't bring in foreign debt. Capital controls at their finest.

@"SSits" probably has a better view on all of this because he spent a long time there, but I just don't like China as a place to do business. The corruption and scams, lack of financial transparency, government involvement in every aspect of business (in reality, you're always a partner with the government because it's so pervasive in every aspect of every part of life, and that's even if the government isn't your explicit partner) and just the general way of doing business there makes it a very challenging environment where the risk outweighs the potential return, at least in my opinion. When giants like Goldman and Google wave the white flag and leave, I just don't think it's a place the mere mortal can make any money. And when you do business there you have to eat the most fucked up food you could ever imagine. I'm not a food wimp by any means but I never thought I'd eat a pig's anus while washing it down with maotai while surrounded by people chain smoking during dinner.

Dec 31, 1969
Dingdong08:

And when you do business there you have to eat the most fucked up food you could ever imagine. I'm not a food wimp by any means but I never thought I'd eat a pig's anus while washing it down with maotai while surrounded by people chain smoking during dinner.

hahahaha

Dec 31, 1969
Comment
Dec 31, 1969