Real Estate: China Popping & Global Overview
by Simon Black of Sovereign Man blog,
According to the Chinese financial publication Securities Daily, emergency real estate rescue packages have been launched in large cities such as Wuxi, Nanning, Hangzhou, Tianjin, Tongling and Zhengzhou in the last month alone.
“Zhengzhou created a mortgage guarantee policy to win back banks’ confidence” according to the story.
Further, “if a borrower does not fulfill the loan repayment obligations as agreed in the contract, the guarantee institutions will have to repay the housing loans…”
What a surprise– a government guarantee.
The market is imploding and defaults are going through the roof. Property vacancy rates in Zhengzhou are an astounding 23%. So the government is putting taxpayers on the hook.
The article goes on: “A legislative affairs official of Zhengzhou revealed to the media that this was the first time for Zhengzhou to carry out such individual housing loans guarantee policy.”
In other words, the government is panicking.
Home sales in China fell last month by 18%, in no small part due to tightening credit conditions.
Developers have tried to pick up the slack and liquidate inventory by offering no money down deals… their own desperation tactic.
But it’s not working.
Over the May 1-3 holiday weekend, new home sales across China’s 54 largest cities were 47% lower than last year.
The national government in China has all but capitulated, and they’ve turned the reins over to local governments to ‘fix’ the problem.
This has been a long time in the making.
According to data from the US Geological Survey and China’s National Bureau of Statistics that was compiled by the Financial Times, in just two years (2011 and 2012), China produced more cement than the United States produced in the entire 20th century.
Much of this development came from centrally planned monster infrastructure projects– bridges to nowhere, zombie train stations, and infamous ghost cities.
So much excess inventory has built up, a major slowdown was inevitable.
This is a huge issue for China given that housing sales comprised nearly 12% of GDP last year.
Even President Xi Jinping recently stated that his nation must adapt to a ‘new normal’ of slower economic growth.
And like the butterfly that flaps its wings, a slowdown in China has substantial effects on the rest of the world.
I’m seeing this first hand here in Chile; Chile is a huge copper producer, and under high growth conditions, China is a top consumer.
As China has slowed, its copper consumption has fallen. Copper prices have tanked.
Over the past few months, the Chilean peso has lost as much as 20% over its average in recent years. And I can see on the ground, all of this has adversely affected the Chilean economy.
But as I’m fond of writing, in every situation, there are winners and losers.
In this case, my team and I are seeing a lot of attractive deals for agricultural property.
What was once a seller’s market just a few months ago is rapidly turning into a buyer’s market as many indebted owners are dumping their properties. Many are in distress.
Yet due to the slowdown, there are fewer buyers in the market with cash in hand, and I’ve even seen several properties go to auction recently.
Meanwhile,
OECD says Canada is it’s third-most overheated real estate mkt, behind Australia and Belgium
House prices: countries with the cheapest and most expensive property markets
Authoritative research by the OECD highlights property markets in Australia and France as overpriced – but Portugal’s a bargain
House prices in Britain are around 30pc too high, according to a study published by the Organisation for Economic Co-operation & Development.
The figures, included in a wider report on economic prospects, offer a signal as to where buyers might be able to find a property bargain – and the nations where they may be overpaying.
Commonwealth countries, in particular, were found to have the most wildly overvalued property markets among the OECD countries. They include New Zealand, Australia and Canada; prices continued to power ahead in all three last year.
Closer to home, prices in France and Norway remain too high, the report indicated. In contrast, property markets in Ireland, Portugal and Germany are undervalued.
Japan, where prices have been in an on-off 25-year decline, remains the cheapest market within the OECD. Despite an unprecedented stimulus programme deployed last year by Shinzo Abe, the prime minister, prices fell in real terms by nearly 2pc in 2013. The wonders that so-called “Abenomics” worked in creating inflation and sending Tokyo shares soaring failed to work on bricks and mortar
Much attention is also paid to the Spanish property market, where hundreds of thousands of Britons have holiday homes.
Taking the OECD’s two measures (which are explained below), the market remains around 5pc overvalued, compared with 12pc a year ago. The numbers for Spain have fallen from 108 and 115 a year ago. For more comparisons with a year ago, see the chart at the foot of this article.
What the valuations mean
The OECD research is based on two different measures of valuation. It compares prices with typical wages and then plots the ratio against the long-term average. At 100, it would be in line with that average. At 150, it is 50pc above the average.
A comparison with wages indicates what buyers can afford but the OECD also captures how prices look against rents. This measurement is akin to valuing homes as if they were businesses – not dissimilar to the price to earnings ratio used to value shares. A figure of 84, the number for Greece, suggests prices are 16pc below the long-term average on this measure.
We have created a colour-coded map to capture these differences and give a rough indicator of whether it is worth buying (green), worth avoiding (red) or in between (orange).
| Country | Annual rise in real terms | Price vs rents | Price vs wages |
|---|---|---|---|
| Australia | 6.6% (2013) | 145 | 128 |
| Belgium | 0.7% (2013) | 158 | 147 |
| Canada | 5.2% (Q1 2014) | 166 | 131 |
| France | -2.2% (2013) | 129 | 128 |
| Germany | 5.1% (2013) | 91 | 83 |
| Greece | -7% (2013) | 84 | 103 |
| Ireland | 4.3pc (2013) | 96 | 92 |
| Italy | -5.5% (2013) | 93 | 108 |
| Japan | -1.9% (2013) | 62 | 63 |
| Netherlands | -1.4% (Q1 2014) | 104 | 117 |
| New Zealand | 8.2% (2013) | 170 | 132 |
| Norway | -2.6% (Q1 2014) | 164 | 122 |
| Portugal | -1.5% (Q1 2014) | 83 | 94 |
| Spain | -4.9% (2013) | 104 | 107 |
| UK | 3.5% (2013) | 134 | 125 |
| US | 6.6% (2013) | 104 | 90 |
| Euro area | -0.9% | 106 | 107 |
| Total OECD | 2.8% | 106 | 95 |
The OECD’s assessment of house prices today:
“House prices and housing investment are now rising in over half of the OECD economies. In Europe, strong house price growth is continuing inGermany (based on data from the big cities) and Switzerland, and has also resumed in the United Kingdom, even though UK prices are already above longer-term norms relative to rents and incomes. Markets remain softer in other parts of the euro area, reflecting weak income growth and tighter financing conditions.
“Recent data, however, suggest that the long declines in real house prices in Ireland and the Netherlands may now have started to bottom out.
“In the United States, housing developments are mixed. Prices continue to rise, but new home sales, starts and builders’ confidence have turned down, in part due to adverse weather conditions in the first quarter of 2014, but also because of a moderation in mortgage purchase applications since long-term mortgage rates rose last summer. Existing home sales have also declined, although much of this appears to reflect a welcome drop in the level of distressed sales. Looking ahead, given the likelihood of continued solid income growth, further easing of credit standards and pent-up demand after a period of subdued household formation rates, the housing market recovery should continue through this year and next.
“In Japan, real house prices are continuing to edge down, but land prices have now begun to stabilise and housing investment has been very buoyant, although this has now faded given the temporary boost provided by the demand for sales contracts to be finalised ahead of the consumption tax increase in April.”
And its assessment from 2013 for comparison…
How valuations have changed from a year ago when the OECD last published the study (May 2013)…
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