Momentum vs rescue in China realty

The real estate market in China has started to move lower, at least so it seems.  Certainly, not everyone is happy about it, as some buyers who bought new flats just months ago are now sitting on an unrealised loss as property developers cut prices.  As we know, that anger boiled over in the smashing of some developer offices.

According to HKET, one property developer has addressed this with an offer for future home buyers to get a refund of the difference between the prices they paid and the market prices three months before delivery if prices fall.  This is not something new, as I remember that Henderson Land (12.HK) did something similar in response to the 1997 Asian Financial Crisis.  So this developer sell flats with put options, which will be settled in cash, fantastic.

The cooling real estate market is not only making previous home buyers unhappy.  Agencies who are more concerned about transaction volume than prices have been struggling. The China division of Centaline real estate agencies has closed 60 branches (or 15% of all branches) in Shenzhen according to Mingpao and fired about 1,000 employees, and 40 branches in Beijing according cnyes.com.  Again, this is not new, Midland closed all of its Shanghai agencies in May, even though they bizarrely opened 11 new branches in Nanshan district of Shenzhen according to Sina News.  We wish them the best of luck.

And for those bulls who are hoping that the government will come to rescue by easing policy, we are firstly unsure when that’s going to happen, and secondly whether it is going to be effective.  For the first part, the good news is that there are signs that selective easing is happening.  Late last week we heard from various sources that China is really easing monetary policy selectively. Mingpao reported on Thursday that some of the banks in Beijing which have practically stopped extending mortgages have miraculously reappeared with loan quotas for mortgages.  That’s probably a minor thing and it is not certain at the moment how that is going to save the market, but it was enough to make equities investors excited for a few days.  The second part is more crucial: whether there will for sure be demand for credit.  If the downward momentum of the property market is established and recognisable, would anyone be very excited about buying a new home with borrowed money? Of course, we don’t know yet whether the tide has turned decisively.

And sometimes the rescue comes from where it is not expected.  Greentown (3900.HK) which was rumoured to be pretty much busted, was “rescued” by none other than Jack Ma, the Chairman of Alibaba.com, according to Sina News.  It is said that Jack Ma is a good friend of Greentown’s boss, thus he organised some group-buying campaign, and offered interest-free loans to employees.

Comments

  1. Classic, by-the-book bubble behavior.

    This is “Asian Crisis II”, bigger than ever, looming up.

    The bubble has to burst one day, even if they manage to re-inflate it a bit again with “rescue” schemes.

    In a free market in land, such as in Houston, it would have been possible to bring newly developed apartments onto the market at far lower actual dollar prices (let alone as a factor of incomes) than China’s property ponzi scheme.

    The disgruntled property investors in China are vastly outnumbered by slum dwellers who have been priced out of apartments that still stand empty, by the “flipping” that has gone on before they were offered to the intended final occupants.

    It is of course similar in any urban land market, even Australia, where capital gains in property are nice for some, but bad for first home buyers. But China is just a more glaring example. India is actually no better, which should add to the global crisis woe when it melts down as well as China.

    I rate the economics profession’s almost total lack of grasp of these realities, as one of the biggest failures of reason in human history.

  2. Diogenes the CynicMEMBER

    This has been coming for some time. The difference is that Chinese investors are much faster at all piling onto one side of the boat…the momentum downwards may pick up much greater speed.

    40+% of Shanghai flats are empty. Apartment prices expressed as multiples of income are well above 10x. And Shanghai is probably one of the better markets…