2014-02-23

China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China

Way back in October 2011 there were stories of real estate rage first emerging: Home buyers in Shanghai angry at massive price drops, smash offices. The anger was caused by a big drop in new home prices, with recent buyers extremely angry at having paid 40% higher prices than new buyers.

Now the rage is back.

The angry home owners weren't as effective in their destruction—it looks as though they only managed to topple a model, but they got the developers offices filled with police.


Although there is a sign there complaining about radiation from high tension wires, the real reason everyone is upset is because home prices plunged from ¥17200/sqm to ¥13800, a 20% drop.

This isn't the only case. After this developer began their "liquidation sale," the surrounding developments also slashed prices sparking a buying panic.

One developer slashed prices by about 12% and had to turn away people willing to pay completely in cash. (Source: 杭州楼盘狂降价脱销 开发商藏样板间怕被老业主砸) All of these developers are worried about pissing off customers who paid much higher prices, perhaps as recently as only a few days ago, but certainly within the past year to several months. Developers now have residents expecting price reductions, with 46% of people polled expecting lower prices in Hangzhou this year.

One opinion writer asks, Why Did Hangzhou Fire the First Shot of Real Estate Price Cuts? (观点时评:杭州楼市为什么打响降价第一枪?)

The main reason is that Hangzhou has a large inventory thanks to large speculation and slow sales in January. Price cuts are being made to move property.

That article also mentions the slowdown in Hong Kong as a hot topic:
Hong Kong's battle to curb property prices still on after initial success
Unknown to most, proposed tax measures had quietly but steadily deflated the bubble that was threatening to push property prices to sky-high levels after Financial Secretary John Tsang Chun-wah's announcement to rein in the market.

Property prices had jumped 80 per cent in five years, making them the most expensive across the world.

Tomorrow will be exactly a year since Tsang's announcement of doubling the stamp duty for properties worth HK$2 million and above, and prices have dropped just 4.5 per cent from the peak in March last year.

Doubling the duty was the third tax introduced by the government in less than two years to cool the market. The first two were the buyers' stamp duty and a special stamp duty, both put in place in October 2012.

Also in HK: Sun Hung Kai Reduces Riva Apartment Prices, Standard Reports
Sun Hung Kai Properties Ltd. (16), Hong Kong’s second-largest developer by market value, cut prices by 40 percent on average for some apartments at its Riva project in the city’s northwestern Yuen Long district, a move that may spur a price war, the Standard reported today.

The developer priced 156 flats, of between 466 and 1,424 square feet, at an average of HK$9,268 per sale-able square foot, the newspaper said, citing the company. That compared with the HK$15,500 price for the first 50 homes introduced last March, the newspaper said. The Riva has a total of 780 units.
The article goes on to say the new homes are now prices 10% below the price for existing homes.

Hong Kong real estate was driven by Mainland buyers. As was Vancouver. As is California:

China-themed malls a new trend in the Bay area
Developers are planning up to $300 million in building two shopping malls in Fremont and Milpitas. Both cities are targeted at Asian newcomers, particularly Chinese consumers.
Bad news for all those property markets if Chinese prices come down......

Some areas are unfazed though. While Guangzhou slides down the list, Xiamen is moving up: 71,022 yuan/sqm: New home prices in Xiamen hit record high
Following a flying start to 2014, house prices have surged to an historic high as the property market in Xiamen has continued to enjoy a boom.

Recently, the new home price of Wanke Mid-Lake Island Housing Estate, which is located at the junction of the Siming and Huli districts, hit a whopping 71,022 yuan/sqm, a price far beyond earlier market expectations.

"It's the most expensive house ever sold in Xiamen. And the price of many houses in the housing estate have surpassed 50,000 yuan/sqm,” a staff member in the company said.

"The excellent position is the main reason for the high housing price. Most of our customers are from Jinjiang, Shishi and Nan’an in Quanzhou. A businessman from Jinjiang has even bought 8 houses.”
Looks like a blow-off top in some smaller, but attractive for living, cities like Xiamen.

Developers shifted away from Beijing, Shanghai and other first-tier cities due to restrictions aimed at cooling the property market. In Hangzhou, there is finally a cooling of prices due to oversupply, while Wenzhou has been down since 2011. In Beijing and other cities though, prices are still up:

January 2014 China's Top 10 Highest Home Prices by City
城市名称Price(元/m2)Change from Last MonthChg YoY
Beijing
37439
0
0.1484
Shanghai
29974
0.0527
0.129
Shenzhen
24927
0.0367
0.1632
Xiamen
21741
0.0295
0.1894
Sanya
21060
0.0428
0.0436
Wenzhou
19374
-0.0387
-0.0818
Hangzhou
18804
-0.0249
-0.0366
Guangzhou
18487
0.0004
0.0639
Nanjing
17786
0.0244
0.1548
Tianjin
15117
0.047
0.1231
数据来源:全国房地产市场数据中心
There are more stories of weakness in the second, third and fourth tier cities though, which were supposed to provide growth, but the talk is that there will be falling prices in first tier cities such as Beijing soon.

As for those smaller tier cities, the news gets worse.

In Xiangyang, Hubei: Development stopped due to lack of capital; Advance sales halted (湖北襄阳一楼盘崩盘:资金链断裂 预售证被撤销). Due to scarce capital, the developer of the Central Park development cannot continue, hopes the government will step in and help and the government is apparently getting involved, having already revoked the firm's advance sales licenses. Real estate insiders say the firm's selling price was too high for the market and this broke the capital chain.

The failure comes after a strong year that saw home sales growth of 50% in the city, but this developer's price was too far above the average for the city.

Also, the ghost cities are continuously growing. 三四线楼市大跃进后深陷泥潭 鬼城榜单不断增加 (Third and Fourth Tier Cities After the Great Leap Forward Stuck in Quagmire; Ghost Cities Growing)

Of 100 cities tracked, 37 have seen prices fall in the past year and 34 of those are third- and fourth-tier cities. Sales volume in 25 third-tier cities has fallen for three months; in 14 fourth-tier cities, sales volume is at an 11-month low. Wenzhou (still listed above as one of the 10 most expensive cities for real estate in China) has seen prices drop for 30 months.

A city named Huai' an in Jiangsu province saw an influx of 380 developers in recent years, despite only having a population of 600,000 people. Probably 200 developers would have saturated the market. One developer developed three projects. The first sold to locals, the second to foreign investors, the third is empty and not selling, yet another addition to the growing ranks of ghost cities and ghost developments.

Stories like this are common. Inventory in fourth-tier cities continues to rise, even though the markets are saturated and prices are falling. Many developers are becoming trapped with their capital tied up in homes.

This has all fueled rumors of a halt in mezzanine financing by the banks: 房企融资收紧传言四起 多银行回应称暂未接到信号

Insiders say they're just rumors, no signs yet, and even so, it might only be one or two banks. Overall the situation is fine, all is well........

Update 02/24 1PM Beijing: The rumors of banks halting lending to property firms is a hot topic in early Monday trading. The Shanghai Composite Index is down 2% at midday.
China shares sank to a two-week low, dragging Hong Kong markets down, as property and banking counters slipped on mainland news reports that stoked fears banks have stopped extending loans to property-related companies.

Commentary

The last time we saw such concern about a real estate slowdown was in 2011 and early 2012. Developers responded by moving into smaller Chinese cities. Now they are trapped. The boom in development helped power the local economy and local officials loaded up on debt. Meanwhile, one of the largest destinations for the trust portion of the shadow banking system, is real estate.

China successfully kicked the can several times, but where do they go from here? If developers are trapped in small cities (which were supposed to save the industry, not doom it) and 40% of trusts come due this year, one doesn't have to be particularly bearish or pessimistic to imagine a crisis growing out of this situation. This also raises the potential for all sorts of conflicts of interest: what if a bank sold a trust to a developer upon whom the bank is calling in its loan or refusing to extend credit because of already high debt levels? Pins are popping up all over China and the credit bubble only needs to hit one of them to start a cascade.

And don't forget, the Federal Reserve is tightening.

This all has major implications for the currency market.

At the start, I linked to a story from autumn 2011, when real estate rage first emerged. Around the same time (a little later in December actually), the renminbi weakened. As it is again.

Offshore Yuan Slides in Worst Week Since 2011 on Growth Concerns
The yuan had its biggest weekly slide since September 2011 in offshore trading after China manufacturing data added to signs of a slowdown in the world’s second-largest economy.

The exchange rate is likely to experience more volatility in the first half, China Securities Journal said in a front-page commentary written by reporter Ren Xiao. The currency isn’t entering into a depreciation trend, the paper said, adding that the yuan will get support from China’s stable growth and an economic recovery in developed nations.
And if that growth doesn't materialize? It doesn't pay to get excited about a a small move that barely qualifies as a blip. However, as this chart shows, it is out of character with the recent past. You can clearly see the autumn 2011 move as well, and do note how fast the offshore yuan fell at that time.

Even though the PBOC can control the yuan inside China, it cannot control it in Hong Kong. The strength of the feedback mechanism is debatable; China obviously isn't as exposed to currency markets as say Turkey, but the exposure is more than zero and I suspect far higher than most economists, investors or financial analysts believe. The PBOC follows the Hong Kong price in order to maintain credibility and it is really an unknown what would happen if the price collapsed. Would China devalue to match the market price, or try to maintain two different prices? If a Chinese exporter has U.S. dollars and could get, as an extreme example, 8 yuan in HK or 7 yuan in China, they have no reason to bring in their U.S. dollars. There would also be Chinese citizens taking out U.S. dollars in China at the low exchange rate and traveling to HK to exchange them. China would have to go back on reforms and tighten currency controls if it wanted to fight the market and prevent its currency reserves from shrinking. In the extreme cases then, China's currency is already exposed to the market. It's the limited cases where the PBOC still wields great power. They can stop a short-term move and manage volatility, but they cannot prevent a systematic crisis or a full fledged currency crisis.

If this keeps up, we may soon hear about a dollar shortage in China, which happened last time the yuan spiked. Also, after the 2011 drop, forex reserves fell. (China's Q4 forex reserves down from previous quarter

It will only take a small marginal change in the economic trends to create a hurricane force in the financial markets. Once the market moves the other way, the shift will be swift and brutal because everyone is on the other side of the trade. How many people out there have puts on the yuan and expect China's reserves to start falling?

The previous real estate incidents and bankruptcies seen in the past few years were blips, with slowdowns concentrated in single cities and the can kicked before it spread. There was more debt to be created and more projects to finance. It appears they are out of projects now, with even small cities saturated with homes. A widespread slowdown may be underway this time with no easy solution, and that will lead to a larger yuan depreciation than we've seen before. A weaker yuan is natural given the amount of credit created, even without a crisis, but a crisis could lead to panic selling. More yuan devaluation is coming this year, and it is unlikely to be orderly. The main question is whether it is brief and the can is somehow kicked again, or if this is the big one.

Update on yuan depreciation: China rates fell, RMB depreciated
First, the Renminbi depreciation was largely triggered by the PBOC instead of the market, so why does the PBOC keep lifting CNY fixing? One plausible theory is that the offshore market players made decent money in January by pushing USDCNH lower which could trigger some speculative inflow. In order to tackle it and make the two-way move happen in the onshore market, the PBOC deliberately depreciated the currency. It also shows that the PBOC does not seem afraid of triggering an expectation of currency depreciation or capital outflow.
If the currency is headed lower, might as well make it central bank policy.

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