“Huge preferential offers” bust Chinese property


Some more fine work from the AFR’s Angus Grigg over the weekend. His weaving together of on-the-ground reporting and bigger picture analysis is delivering some excellent journalism. Here’s a taste:

After a low-key week of protest by around 100 aggrieved buyers, the security guards in army greens showed up last Sunday. Predictably, the situation turned nasty. The protesters claim two of their members were kicked and beaten by the guards as a series of ­scuffles broke out.

When AFR Weekend visited on Monday the temperature had been lowered, but the tense stand-off remained. At the time of publishing the developer was still refusing to meet the group and the local government was ignoring their pleas to mediate.

Either way, someone is facing a sizeable loss, be it the developer, banks or buyers. The protesters estimate the 700 families who bought into the Noble Garden development in early 2012 are down a combined 300 million yuan. And that’s just one development in a single Chinese city.

…“The oversupply in lower-tier cities is very obvious,” says Andy Chang, an associate director at Fitch Ratings in Hong Kong.

“I wouldn’t be surprised to see more and more local developers collapse.”

Yao Wei, an economist at Société Générale, is even more resolute. “Signs are mounting that the housing market in a number of cities is not just cooling but actually cracking,” she wrote in a note to clients.

…This is the worry for investors – that the true picture is being hidden by the official figures. Equally, the government is trying to give the impression that prices are holding up, to avoid a buyers’ strike.

…In a bid to dampen fears of a steep correction, the local government ordered developers to stop using the words “price cut”; the discounts are now known as “huge preferential offers”.

…If its rumoured financial troubles are correct then it would represent a significantly bigger problem than markets have been anticipating.

The ponzi borrowers appear to be in for it.

Houses and Holes
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  1. It cant come soon enough Hugh. I am tired of waiting. I cant wait to see how our authorities handle this. Prices in Australia are son high I don’t see another round of stimulus helping.

    • Hugh PavletichMEMBER

      Rod77 … to get a sense of the scale of these issues, researchers, commentators and others need to focus on “multiple stretch” of housing markets … in other words, how inflated housing markets are inflated above 3.0 Median Multiple. Then quantify the $ involved.

      An article earlier in the year of mine China: Big Bubble Trouble and the Annual Demographia Surveys should be of some assistance in this regard …



      It all makes the 07 / 08 events look like a walk in the park.

      • What is the fixation with a 3 times multiple?

        Is a 3x appropriate when rates are 15% and still appropriate when rates are 5%?

        Is a 3x appropriate when houses are 12 squares and still appropriate when they are 25 squares?

        Houses, like everything else, respond to changing market conditions, cost of financing and yield competition from other assets.

        Share valuations move against Tobin Q, Bond yields, Earnings, Average earnings (PE10, Cyclically adjuste PE), why will dwellings remain at 3x through good times and bad?

      • Many many years ago it was a starting point for servicability calculations, but it was never an overriding factor. People who have a modest income struggle with that level of debt and people with a high income easily meet that debt commitment.

        Somehow it’s become a myth adopted by the community at large that any debt above 3 times income is an issue regardless of interest rates, taxation rates, or middle class welfare benefits including paid partental leave.

        Excel spreadsheets have superceded axes.

      • Explorer:

        Here is what I think a 3X median multiple indicates. It indicates an absence of economic rent of the “extractive” type.

        There is a subset of international data now, of cities with a median multiple of around 3. In historical data, there were a lot more cities that fell into this category. Their falling out of this category always coincides with their urban planners or someone else with similar power, curtailing the availability of non-urban land for conversion to housing use.

        In median multiple 3 cities, it does not matter what interest rates are, just as interest rates do not make the price of cars or TV’s change. In fact it hardly even matters whether there are mandates regarding the size of houses or sections or number of stories; if there is freedom to convert rural land to urban use, median multiples will end up around 3.

        But in cities with higher median multiples, typically 6 or more, there is a similar relationship between incomes and house prices, with the economic rent in land being the variable that takes up any slack in anything else. No matter how much more density is allowed, median multiples will end up 6+. For example, the price of new McMansions on the fringes of Boston on minimum mandated 1 acre of land each, cost about the same relative to incomes as townhouses half the size on the fringes of UK cities, 20 to the acre. The 1 acre minimum lot mandates and height restrictions in Boston actually keep the price of land per square foot down. This price is easily 100 times or more higher in the UK cities.

        As long as you prohibit the free market conversion of low cost rural land to housing use, you create extractive economic rent in land. You will not be able to restore lower median multiples by any means; allowed heights and densities will merely change site rents, not floor or “unit of space” rents. You will have examples of all sorts of interest rates, densities, house sizes and house types, subsidies to ownership, house quality levels – but the median multiple will be 6+. The variable will be the price of land per square foot.

        But in the median multiple 3 cities, the price of land per square foot will be calculable from exurban values being anchored in low rural prices; fringe land will cost a premium for the available infrastructure, and land progressively closer to the city centre will be priced according to “option values” derived from the fringe land values – plus cost of travel saved and plus location-derived agglomeration efficiencies. There will be little or no extractive rent in the prices. In these markets, typically what buyers get for their 3X household income, will be progressively improving as time goes on, just like with cars, TV’s appliances and so on. This is what free market capitalism DOES.

        In the median multiple 6+ cities, the process will tend to run the other way for most people, more so the further down the income distribution they are. Housing will get tighter and tighter for the same share of income, quality will reduce, local amenity will reduce, and so on. Only the rentier class will be gaining, via the price of land per square foot.

        Free lesson in applied urban economics. Unfortunately not one you will get from very many sources these days.

      • Hugh PavletichMEMBER

        Explorer … you may find these two items of interest …

        Report: Housing affordability out of sync with incomes … SMH


        … and note the excerpt from the Portfolio com article by Michael Lewis within “Housing Bubbles & Market sense” …


        This is the widely accepted conventional structural approach to housing. Bubbleonians detest it … of course !

      • Thanks for replies and I have read 4 Demographia reports and find it all very interesting and the Economist interactive historical value tool that also considers returns on rents.

        I just think that the 3x is an arbitrary figure and expect that at different times people will be willing to pay more or less and vendors will want more or be willing to accept less. Mean reversion style arguments might be generally correct, but the mean is always changing somewhat and the timing is impossible to predict. The market can stay irational longer than a person can stay insolvent.

        Sure, the marginal supply is a big potentially big impact, but the government controls it and is unlikely to allow it to increase significantly because a significant fall in house prices is so disruptive. There is a huge vested interest in preventing any significant fall and in keeping the system of inflation and increasing house prices going for another generation. What people might think “should be” and what is “likely to be” can be two quite different things. I think 3x is more a “should be” in the absence of significantlly higher unemployment. The other risk is at the end of a period of overbuilding accompanied by a rise in interest rates and while an increase in supply over 3 years is likely, there is a lot suggesting rises in rates are not likely for at least 5 years including mining cliff, car industry, US and European unemployment, China slowdown (hard or soft landing).

        Personally, with adult kids who don’t own and us with no gearing, I would love prices in sydney to fall 40% and then come back up at inflation plus 1% from there, but I just can’t see it without very significant additional unemployment.

    • +1 rod I’d vote for this wholeheartedly here if I could. Purchasers paying too much, banks lending too much, and vendors demanding too much – all of the above need to cop it.

    • Explorer, you have not taken in my comment.

      The median multiple of 3 is NOT “arbitrary”. It is where free market capitalism puts house prices when governments do not rig the urban land market.

      We do not have the luxury of fine tuning affordability with interest rates, upzonings, construction productivity, etc, when the urban land market is rigged as it is. “Housing” WILL BE DOUBLE the cost it should be, REGARDLESS of all other factors. The only thing that will vary, is the price of land per square foot.

      If you accept the rigged land market because you accept all the other pretences surrounding “housing affordability”, you are a useful idiot IF you are not an outright knowing agent of deception. I am quite sure the world’s wealthiest property investors know all this stuff all too well. Reading the list of funders of any “smart growth” study can be quite an illuminating exercise. Soros and Rockefeller money are all over it. Even a recent study about what Christchurch NZ should do in the way of planning the post-earthquake city, had “Rockefeller Foundation” mentioned in it somewhere.

  2. thomickersMEMBER

    I hope the relegation battle between developer and investors finish 0-0. Sick and tired seeing investors getting awarded penalties in injury time

  3. “At the time of publishing the developer was still refusing to meet the group and the local government was ignoring their pleas to mediate.”

    Why would that be? Corrupt local govt fingers in the pie perhaps?