Chinese developers caught in accelerating bust

It may be time for developers to start panicking. Remember the buyer stampede when Hangzhou lifted home purchase restrictions? Ifeng is reporting that the effect is fading quickly as buyers wait for prices to bottom. One sales agent said it seems like ending buying restrictions had no effect.

The reporter in the story says that the gap between a rebound in sales and sales agents not seeing a change in the market is due to the market having not yet formed a bottom. A rebound is preceded by a bottom, but the market in Hangzhou hasn’t stopped falling.

Perhaps the reason is because the market has put in a major top and a bottom is still a long ways off.

The latest count by the Chinese press puts developer inventory at 3 million square meters across 35 cities. Firms in Beijing are already cutting prices via their sales staff to hide the cuts from the wider public, in what are dubbed “internal sales.” Chinese analysts are talking of “inevitable” price cuts waves that could see prices of new developments from big name developers cut 20% to 30%.

Ifeng is also reporting that among 71 listed developers on the Shanghai and Shenzhen markets, financing costs increased by ¥1 billion in the first half, or nearly 30% yoy. Slower home sales have slowed the return of capital and increased the developers’ financing needs.

Bloomberg nicely captures the pincer that developer are caught in as debt rises and equity falls:

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China’s largest property developers risk missing their full-year sales targets as tighter credit and an economic slowdown cut demand for real estate, fueling concern the industry will struggle to repay debt.

If this breaks bad, the fallout is not going to be limited to the Chinese market.

Comments

  1. Will this development in the Chinese housing (non) market coupled with a fall in our ToT have a near term impact on the Mega bank funding costs?

    Common sense would suggest it likely, however my common sense has not been useful for so many years now, that it remains in the attic covered in dust.

    I am sure it will be useful one day but for now, using common sense in economics has proven a liability.

    • It’s already having an impact on both banks and the sovereign. Funding costs are stilling falling a little but relative to other jurisdictions our spreads remain elevated. That is, the chase for yield has been enough to prevent Australian spreads widening but we’re severely undeperforming everyone else.

      • The chase for yield only works for as long as there is no better alternative for surplus/investment funds. When an alternative need arises back home, wherever that is, then funds get repatriated. That is paramount among our vulnerabilities. What do we do when carry-yield is not enough to keep funds here? Lowering interest rates isn’t the answer. At some stage, everyone is going to have to compete for liquidity. 5 years of enforced yield compression has left our economies little changes at heart ( and probably worse off!) and has in fact converted the last bastion of our economic defense – savings – into even more debt.

  2. reusachtigeMEMBER

    It couldn’t be happening to a nicer bunch of specufestors, well until it reaches Australia that is.

    • Nah Reusachtige – I’m sure that the HIA spruikers will find a way to try to sell this: “Go all in!, Go bigger, go …err.. bust home?”

    • Uranium GeoMEMBER

      @ Reus I’m starting to wonder if many of your posts that now contain less nonsensical material reflect some kind of inflection point. The Reusachtige sequence/ratio perhaps?

    • Don’t worry, new companies are springing up like mushrooms offering both real estate and immigration services, helping the corrupt flee from their corruption and launder their money. Australia can’t lose! Go go go!

  3. If Chinese investors notice that Chinese prices are falling, they will take their money out of Chinese real estate and pour the funds into Australian property which always goes up – albeit only doubling every 7-10 years.
    The Chinese always think 600 years ahead, so they know what they are doing.

    • Do you doubt the resolve and focus of the FIRB to enforce the FI regulations with efficiency, diligence and without fear or favour or those administering the Significant Insider Visa Scheme to limit acceptance to those seeking to genuinely add to the productive capital stock of Australia?

      I guess so, which means your judgment remains sound.

      • Strange Economics

        And Canada abolished their equivalent SIV scheme, as of no benefit to their own house bubble. America has filled theirs for the first time ever. So Australia is the last English speaking country refuge. MacBank will then lend you millions to invest in Oz property (which apparently never goes down). Things are different in Oz. Sold!

      • @Strange – So true. As I was told at a PI seminar just before the GFC, “Australian property never goes down, and if it did we’d just buy more”

    • LOLZ “the Chinese always thinking 600 years ahead”. Indeed, they have discovered the magic crystal ball. Probably why many of them were eating grass due to the starvation caused by the Greap Leap Forward. They thought 600 years ago maybe we should hide in caves and eat grass. Magically how only 20 years or so ago when Deng started developing a form of capitalism near the coast we now presume China, a centrally planned economy, has all the answers of how to run a deep and complex capitalist machine.

      Reminds me of the Japanese Miracle and the keiretsu

  4. Quick! Lever up now and buy more houses, before the Chinese investor horde descends and bids our property to the moon.

    Now that their market is looking shaky, they’ll be looking for a place where property is a sure bet.

    Pile in now, and get rich!

    • More young people without their own home, more future problems for any government. This obviously is missing from any policy considerations.

    • Indeed, all based on the premise, as quoted from the article that “So eclipsing and encompassing all these factors is the economics of investing in Australia. The Chinese know that property is always a solid investment, and Australia is still one of the best property markets around.”

      “Australian property is one of the best property markets around” because…..drum roll……….. it just is. A nice, clean, easy positive feedback loop. No bubble here my friends.

      • … and Qantas is the best airline ever, not a single crash!!! Go all in on the Flying K and you’ll retire early guaranteed

  5. this is all positive for Australia right? All those Chinese investors dumping out of China will come and throw their RMB at the Australian market and keep it going. Remember Aus real estate can’t lose and for every dark cloud I can provide a silver lining to the Aus housing market. So, China property crash benefits Australia as investors pile into Australian real estate market which is still going up and is supported by a stable economy, strong legal system and well regulated banks and rising population / chronic undersupply. On the other hand, if Chinese property stabilises or begins to rise again, Australian property will also go up because it means all those Chinese investors have more money to invest into desirable markets like Australia.

    See how it works? Australian property is different and it only goes up.

      • Indeed I do a great Shane Oliver impersonation, You know – the guy who doesn’t work for a real bank so is even more spruiktastic than the Big 4 economists in the hope one day he may join their glorified ranks,