100 year wait to turn a profit on a Chinese house

Cross-posted from Investing in Chinese Stocks.

The first column after the city name is its tier, then rental yield and payback in years. Xiamen tops out at a 1 percent yield, or 100 year return of capital. You might think that’s overstating things a bit, but it’s also a gross yield and doesn’t include maintenance, taxes and other costs. Most of the yields are also far below mortgage interest rates, as much as 50 percent below. Unless investors are paying cash, many properties won’t have a positive cash flow (ignoring inflation and price rises) for far longer than forecast.

The table highlights how Chinese home valuations are based almost purely on expected price appreciation. If forced to hold and rent, if the market tops out like Japan or the United States and enters a multi-year or multi-decade decline, returns will fall through the floor. For comparison, here’s a 2016 list of Top 20 Cities In U.S. For Investing In Real Estate Rentalsfrom Forbes. Most of the cities have yields around 5 percent, including Austin, TX. It is not a list of the cheapest bargains, rather its cities with good yields and good fundamentals such as population growth and job growth.

This table compares foreign and Chinese city rental yields. On the left is the city’s international grade. NY and London are A, Toronto and LA A, Orlando is C-, New Castle and New Orleans at the bottom. Comparable Chinese cities are on the right.

Caijing: 中国租金回报率地图:厦门回本要100年 一线城市都哭了

Some of those yields look good versus China’s most southern capitals:

The rise in dwelling values across the combined capitals over the month has not been matched by a rise in weekly rental rates, which means gross rental yields have slipped lower over the month. Gross yields are once again at new record lows across the combined capital cities, driven by further falls in yields across both Melbourne and Sydney…

Over the past five years, gross rental yields have compressed across every capital city apart from Hobart where yields are unchanged at a reasonably healthy 5.2%. The most substantial decline in rental yields has been in Sydney, where dwelling values are up 77.3% compared with a 15.5% rise in weekly rents.

Why did we ever let the Chinese loose in our housing market?

Comments

  1. Those homes are really unaffordable. The Chinese government should lower interest rates to help workers buy homes.

      • Home owners don’t expand stock. Only investors do that (even when buying existing stock apparently). So we need a first home investor’s grant. Govt contributes some of their (our) money towards your first 10 properties (existing or new).

  2. proofreadersMEMBER

    “Why did we ever let the Chinese loose in our housing market?”

    Because Straya has been run for years by a series of corrupt governments one after the other?

    • No it was Kevin Rudd and his ‘unique understanding’ of the Chinese that started it. Successive govts only then realised how much $ could be made once the influx started.

    • billygoatMEMBER

      Why did we ever let the Chinese loose in our housing market?
      a) Because greed
      b) Because political correctness
      c) Because its racist not to
      d) All of the above

      • So if it was American money or European money or any other white money, it will not have an impact on housing prices here? I didn’t know money’s impact on asset price dependent on the racial profile of the person holding it. Fail.

      • The Traveling Wilbur

        When one nation’s buyers puchase properties and leave them untenanted thereby artificially inflating rental prices, and this is not a trait of other nations, yes.
        So, not fail.
        Pass. Go to the head of the class.
        Extra credit awarded for demonstrating how other peoples’ stupidity leads those people to assume another person’s POV is driven by a racist attitude when the subject involves culture and requires a bit of thinking.

    • Because it’s easy to sell the farm to buy milk and leave a mess for the next generation than it is to actually milk the damn cow yourself and leave the next generation with an asset.

    • No different to here where they buy them and keep them empty. I wonder if they pay their strata fees or just let them build up.

      • its not enough for the chinese to make gaudy imitatives of popular consumer brands, now they are doing it with whole cities

    • Just part of the massive malinvestment taking place in China. To some degree, this seems to be a feature of developing country growth cycles, but it exists on an epic. historic scale in China. One day the debts underneath all these things need to be paid off. But at the moment there seems enough money in the system to keep it all afloat.

      And the way the whole model seems to operate in China is to build stuff in all kinds of places, just to book “growth” in the municipality. With the idea that maybe some day it will actually be used. Build it and they will come.

      But in fairness if someone built a few cities in the outback, wouldn’t make any difference at all to prices in Syd/Melb.

      • “… there seems enough money in the system to keep it all afloat.”

        Given that the government has ordered the state owned banks to ‘roll’ most delinquent loans for eternity and given that ‘money’ can largely be created out of thin air, this charade can and has lasted an awful long time.

        The issue is that you can’t create capital out of thin air and it is the stock of real capital that is at stake here. The malinvestment obviously destroys capital, so the question becomes, is the Chinese economy generating capital faster than it’s destroying it? The length of time this farce can continue hinges on this relationship.

    • If you built an enormous ghost city the size of the greater tokyo metropolitan area on the Nullabor, it wouldn’t harm Sydney prices in the least. Ghost cities in China are kind of like Canberra- they’re government projects trying to create viable cities from scratch. But most cities become big because of something else- a port, a cross roads, nearby mines etc.

  3. To boot , my understanding is that they are 100 year leases only and not freehold.
    Though good luck having those buildings standing half that time.

    • Doesn’t stop people at all. ACT also has no freehold, yet look at their prices. Over the next few decades more than a few homes are going to be up for renewal. Homeowners better hope the ACT doesn’t badly need a road or rail development where their house is.

  4. Yield! Such a 1990s thing. You won’t find that chapter anywhere in the Greater Fool textbook, it’s all capital gain now.

  5. sydboy007MEMBER

    My understanding is the type of relations parties that help the Australian rehearse market are technically illegal in China.

  6. The last time Labor got into power they opened the floodgates to this money. I wonder what’s coming next time.

    • LNP been in power since 2013 mate. We’re almost to 2018. Maybe time to stop worrying about the boogeyman.