Thursday, 9 June 2011

Chinese Bears

A now all too familiar tune.

And a one, a two, a three and four....

  1. Prosperity,
  2. Greed driven credit binge,
  3. Real Estate speculation,
  4. Meltdown.

AFTER years of housing prices gone wild, China's property bubble is starting to deflate.

Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.

Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors.

Real estate is also a favoured investment of Chinese looking to get better returns than bank deposits pay.

Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects.

World Bank economists warned at a Beijing press briefing that a real-estate bubble was among the biggest economic risks China faces.

Already, in nine major cities tracked by Rosealea Yao, an analyst at market-research firm Dragonomics, real-estate prices fell 4.9 per cent in April from a year earlier.

Last year, prices in those nine cities rose 21.5 per cent; in 2009, the increase was about 10 per cent, as China started to recover from the global economic crisis, with much steeper increases toward the end of that year.

A downturn in property and apartment prices would harm Chinese industry and investment, and crimp consumer spending.

China is a "housing-led economy", says UBS economist Jonathan Anderson, who estimates that property construction alone accounted for 13 per cent of gross domestic product in 2010, twice the share of the 1990s.

While China's anticipated growth is still well above that of other large economies, any reduction could have deep consequences.

The global economy is now even more dependent on China for demand for anything from commodities to luxury goods, given the tepid recovery in the US and Europe's continuing sovereign-debt problems.

If the Chinese housing market slows faster than people had expected, the impact would be felt in a number of markets that export heavily to China.

Many Latin American and African economies have shifted their focus toward Chinese demand for their raw materials, and many Western firms, including US retailers and fast-food chains, now bank on Chinese consumers feeling wealthier to make up for stagnating sales elsewhere.

 Got that? A "housing-led economy" .
Standard Chartered Bank estimates that China's so-called tier-two cities, such as Dalian and Tianjin, may have 20 months of housing inventory by year end, putting "substantial" pressure on prices.

Standard Chartered forecasts price cuts of 10 per cent to 20 per cent "in many cities".

A number of analysts think official data, which has continued to show a slight rise in prices, understate the slowdown as the government can affect the numbers by pressing developers to withhold or add high-value properties to the market depending on what it wants the data to show.

Partly as a result of the Chinese real-estate slowdown, prices for key industrial metals used in construction have softened.

Spot copper prices have lost 5 per cent since early March, and have now fallen to around 69,000 yuan ($10,000) a tonne after racking up 34 per cent in gains between June 2010 and March this year.
Major steelmakers have been consistently cutting their product prices since February.

Chinese officials, facing widespread anger from ordinary citizens who can no longer afford to buy a home, have sought to slow the rise in housing prices.

Since January 2010, the Chinese government has introduced a number of measures to stem speculation, including boosting down-payment requirements on mortgages for second homes to 60 per cent from 40 per cent, barring state-owned enterprises outside the real-estate sector from investing in property and lifting the amount of cash banks must hold in reserve 11 times—essentially reducing funds banks can lend.

"In some ways, (real-estate) prices are really crazy," said Guo Shuqing, chairman of China Construction Bank, in an interview last week

He says the cost of apartments in big cities is well beyond young couples' means.

Beijing has one of the most expensive real-estate markets in the world relative to the income of its citizens.

Calculations based on Soufun data show that in the opening months of 2006 an average-price new apartment in China's capital would cost around $US100,000 — the equivalent of 32 years' disposable income for the average resident.

By 2011, the average price had more than doubled to $US250,000, but relatively modest increases in income mean it would now take 57 years of saving for the average resident to cover the cost.

In Shanghai, apartment sales tumbled 37 per cent in April, to 11,000 units, compared with 17,500 units in January, according to the Shanghai Real Estate Trading Centre.

With business so slack, Midland Realty, a unit of Hong Kong-based Midland Holdings, closed eight of its nine offices in Shanghai.

57 years income for an apartment!!! Thats like an apartment in Australia going for $3.4M!!

Zhang Kai, an agent at Home Link in middle-class neighbourhood Tuanjiehu said the number of sales had dropped by half since February and monthly rents for small apartments jumped to about 3000 yuan in June from 2500 yuan a month earlier.

Many apartment owners don't want to sell, he said, because they are waiting for prices to turn around.

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