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i'm not moving to china.
I second that..
Foreclosures in the US were not very common either when we had 20% down payment requirements. Prudent lending... and dont try to levitate the poor beyond their means...
China had to do something with all that toxic drywall
At $2,000/sq ft, a 2700 sq/ft home would go for $5.4 million. And you thought housing in CA was expensive.
"But the bigger reason for rising home prices in China may simply be due to an imbalance in supply and demand."
It is always different this time, isn't it?
ShadowInventory wrote:
Prudent lending... and dont try to levitate the poor beyond their means...
Why bother when you can crush them further into the dirt by standing on their shoulders via skim on the money they borrow, and reach a higher plane of financial enlightenment before the scheme collapses?
You get the same "we've got a housing shortage, it can't happen here" attitude in Australia. Always the same.
YouTube - Frank Zappa - Black Napkins
Most people in China put far more than 20% down too - that is just for the low income buyers. 50% down is common.
And most people didn't buy at the top, so prices could fall substantially, and homeowners would still have equity.
I think the prices are out of whack, but I don't think there is mortgage credit bubble link it the U.S.
best to all
iceman wrote:
Do they even build houses that big in downtown Beijing?
I'll look forward to Michael's subsequent posts. I think it's natural to question the affordability factor there, and important to understand appraisals, creditworthiness, the whole panoply of considerations which contributed to the bursting RE bubble here.
Have some difficulty reconciling a narrowing supply with the many photos of entire communities standing vacant (though surely not Shanghai) and reports of see-through high rise condos even in the major cities. But he'll know. And we'll learn.
i hear the insanity first hand from relatives in China.
buying apartment sight unseen in 3rd tier city with downpayment supplied by parents.
dingy 1 bedroom apartments in good parts of Beijing going for 250k usd.
apartments being bought and never rented out. Or rent for apartments that sold for a few hundred thousand usd renting for a couple hundred a month.
in the last couple of years there was also plenty of low-down, low-interest mortgages happening.
When my in-laws are telling us to buy again I know we're in a bubble again.
Spurned by banks, China property firms court PE funds
| Reuters
Banks drained. IPO market sated. Who can we get money from? Private Equity: pension funds eager to invest in Chinese Real Estate. Because the price of houses never go down.
Last I checked, China was dependent on the US consumer.
It doesn't sound like a mortgage credit issue (like the U.S.), but there are a couple of concerning points:
1) the prices (Mike will address this, but I know families save and pool the money to buy a property).
2) the command and control nature of the market. Imagine if they built 10X as many homes - the prices would drop sharply. And that is always possible.
best to all
The central government's means of curbing overheated property markets reads like a Monty Python skit. The trouble in PRC condominium and office-space markets isn't those intrepid souls putting down 50%, but rather the developers who've put down almost nothing, and who are financed by bonds guaranteed by provincial authorities without central bank sanction. The standard retail market, as described, isn't the problem, is it? Not until prices soften, that is.
For the first time China (including Hong Kong) has the most billionaires outside the U.S. with 89. IMHO is a strong indicator that yes China has gone to the darkside of copying the delusional american housing bubble.
"Citigroup Inc's (C.N) private bank joined hands with state-owned conglomerate China Resources Group to raise about $500 million for real estate funds to invest in Chinese shopping malls, Reuters reported last month."
It reminds me of articles I read in 2006 about the US market - yeah, it could be a little hot, but overall, just a healthy market.
We shall see.
Back in CA:
"“It is clear that the federal tax credit for home buyers worked well in 2009 and is continuing to drive home sales,” said Steve Goddard, president of CAR. “The home buyers’ tax credit is arguably the most successful strategy employed by the government’s efforts to stimulate the economy.”
Of those surveyed by CAR, 40% of the homebuyers said they would not have purchased a home without the credit. Nearly 70% of those surveyed said the credit was either “very important” or “most important” in their decision to buy a home."
If true, tick, tick, tick......
What are the historical metrics in China? Those prices seem to be a tad more than 3x median income. With lower construction prices, there seems to be much implied in land valuation. They do have many more folks chasing fewer square feet. Another factor is the composition and percentage of other assets. If there is a large economic imbalance, a 50% drop is easily conceivable.
rosethorn wrote:
Remember you can never have too many empty luxury shopping malls in a country of 1.3 billion people.
CR - can you ask him about commercial RE - especially office and factory space. I have buddies over there too and they report A LOT of vacant space - way more than we have here. We wonder who owns it & what the consequences are [assuming its like that everywhere - my friends only see slivers of the whole]. TIA
Unless you get KH doing HQP on extended preset NOOs, it looks like more PSA unless Fedgov throws in the towel.
And, yes: I'll take two, please.
Ask one of Prof Shiller's questions:
"How much do you think the price of homes will go up each year for the next 5 years?"
If that number exceeds 10%, yes, it's a serious bubble.
What was the mortgage situation in Japan in the 80's? Didn't they have much tighter requirements than we see today in the US? And yet their property boom and crash make Vegas look like small fry. Do you really need a mortgage bubble to make a bad real estate bubble?
Gringo reporters(save CR correspdents) don't usually get past the pricey part of town?
Hoocoodanode?
ghostfaceinvestah wrote:
Exactly what I thought when I read that.
hmm, should i invest money in dubai or china? so many places to flip!
My parents own a house in Korea. During 1980s when the country's GDP was around $5000 (nominal, not inflation adjusted), that small brick house on 2500sq ft plot of land in a very desirable neighborhood went for $500k USD in nominal term. I don't think my father made more than $25k/year back then. They bought the house in 1982 for around $90k, but with inflation, real estate mania, and luck, the house value went up by several folds within matter of few years.
Over the past 25+ years, there has been ups and downs in the real estate market over there, but with sustained economic growth, there was never a crash. My folk's house is worth about the same as it did 20 years ago in real term (including opp costs), but his income has definitely caught up.
So we can harp on the income-to-home price all we want, but I don't discount the possibility that there won't be a housing crash in China if majority of their homes were purchased with high down payment.
Rajesh wrote:
Some of that is a pure CNY-USD play... buy a $100MM worth of property in China at 6.8 CNY... then when USD goes to say 5 CNY:USD... sell and make a 'fast' $36MM in dollars [assuming the property prices stay the same]. Its a modern form of arbitrage in a currency with capital controls.
Anyone know of a quantification of the impact on your lifespan for each year spent living in China?
The one child policy will flatten things out.
ghostfaceinvestah wrote:
Yes, but it's a vastly different culture with a wholly different structure of checks and regulation. We don't, for example, have the same approach to pooling family resources in order to assemble a down payment. Undoubtedly, there's much else.
Probably safe to say that in China, it's different all the time. Best to reexamine basic assumptions. They may not apply.
Western businessmen in China are all pretty optimistic about how the economy there will do. I think the ones who are pessimistic have moved somewhere else.
Oxtail wrote:
You probably need some sort of leverage. BoJ was pumping money out pretty fast & furious trying to offset the deflationary pressures from Plaza. A lot of that went into Japanese real estate before they discovered the magic of the 'carry trade'.
What happens when the older generation has to sell off its property investments for income?
Oxtail wrote:
I have the same questions.
Wages in China are a fraction of those in the US...how long does an extended family of five have to save to come up with a big downpayment?
burnside wrote:
Japanese are more risk adverse financially than Chinese. Culture has nothing to do with bubbles.
Check out the Shanghai Stock Market for the last few years to see how well their checks and regulations control bubbles.
scone wrote:
Don't miss this one. Live with the lineup that originally recorded it.
YouTube - Frank Zappa - Inca roads
Oxtail wrote:
I don't say they do. But if we're going to examine the likelihood of froth, the analysis should reflect the reality there, not here. Point is, it's not the same.
I do miss Brad Setser. He gave good macro.
Alternatively, what does Junior do when Mom and Dad (and his sisters and his cousins and his aunts) demand Junior take care of them in old age?
What are mortgage default rates in China?
Oh, that's right, the government won't release that data.
Call Gilbert and Sullivan?
burnside wrote:
Me too - you have no idea.
Chauncy Lives!
World's richest man, Slim, a born wheeler-dealer
'Wealth is like an orchard," he told Reuters in 2007. "With the orchard, what you have to do is make it grow, reinvest to make it bigger, or diversify into other areas.'
I can't help thinking about CA, where house prices levitated higher for decades because of a supply-and-demand imbalance. It did eventually crash, but then recovered, just to crash even bigger.
China crash might be a couple decades away.
This doesn't sound like a bubble at all.
Market Defies Fear of Real Estate Bubble in China - NY Times
"Signs of exuberance are everywhere. An investor in Shanghai recently bought 54 apartments in a single day; a villa sold for $30 million last year; and in December a consortium of developers paid more than $3.5 billion for a huge tract of land in Guangzhou, one of the highest prices paid for any property, anywhere. In the city of Tianjin, in north China, developers have created a $3 billion “floating city,” a series of islands built on a natural reservoir, featuring villas, shopping malls, a water amusement park and what they say will be the world’s largest indoor ski resort."
ghostfaceinvestah wrote:
ghostfaceinvestah wrote:
Sounds like Dubai.
Does no one learn, or is everyone special?
ghostfaceinvestah wrote:
Speaking of things that remind me of the bubble in Japan.
Snow Japan - Artificial Snow Resorts in Japan
banksters need places to play doncha know?
josap wrote:
Special like in they get
's and :skittles:? Or special like in :shortbus: and :wearshockeyhelmet:?
It's different this time, all the time, everywhere.
I might agree CR. But the big realty is that the migration from rural to urban has its pains in terms of affordability as far as domestic demand goes. You were amiss by not commenting on the proclivity for locals to save vs buy things and that fact that most look at urban centers as workplaces not home places. This may change over time, who knows.
I do think, however, the commercial side is another story. The World Expo coming in a few short months will give some insight as companies gravitate to major centers and "outsiders" look to set up shop.
I think the bigger story is land use policy and intensive farming that now has to take place to feed the masses (as farmers become off site workers). Russia has tried this (intensive improvements) and it failed. This hicup is the real bubble as we go throught 2011 and 2012.
If you are uncertian about the rising middle class here is a tidbit:
- for the 2010 Olympic Games in Vancouver, Visa said the third highest foreign purchaser was (from) China and the average transaction was just north of $500 whereas the local Vancouver folks spent, by the numbers way less and the average tranaction was $87.00
All in my humble opinion of course
I am very skeptical of new users that share anecdotes of this nature.
38th parallel north - Wikipedia, the free encyclopedia
dryfly wrote:
He's gotta be getting bored after so many months of being sidelined by Obama's inner-circle. We should encourage him to start doing something useful again.
dryfly wrote:
Speical, as in :short bus: looking for
?
It just amazes me that people can do the same thing over and over with the same results. Even if they put 20% or 40% down, our values have dropped over 50% in some places here.
noob goldberg wrote:
MMmmmmmmm.....
!
jumps on bandwagon ... it's a bubble, and so is Australia.
Wow, we really can party like it's 1999:
Sex.com 'to become most expensive domain name in history' - Telegraph
I think the real story is that a society that can flood the World with cheap goods also has a class that can afford $22,000 per square meter homes. What an income disparity this must imply!
less leverage = more survival time during downturns. makes sense. if something goes wrong, people will lose houses but not like it happened here. You had people putting 5% down and buying houses 50x their annual income for God's shake...
how about 19 years right before 1982, which you seem to recall with great clarity?
90k for an urban brick house anywhere in South Korea?
I'm packing my bags.
If anything I would expect a nation of savers (which China and more generally Asia are) to experience more savage and catastrophic bubbles than a nation where few people save. You don't see bubbles in areas where no one has anything to invest.
And yeah, the biggest symptoms of effervescence are in CRE (I'm guessing those investors have more guanxi), but I'd assume housing is similar.
The big downpayments might seem like they help, but if people can also borrow that money through other channels (family, etc.) it may not be any use. Does China have credit rating bureaus like those here, with fairly complete access to buyers' financial information?
Further, the problem with bubbles is that if the liquidity is there, they end up baking all that supposedly extenuating information into the prices, and just peak even higher.
*Does China have credit rating bureaus like those here, with fairly complete access to buyers' financial information?
*
LOL! +1 - Like they need folks to tell you the time from your wrist watch while looking in the rear view mirror
BTO is short form for a famous band.
i would like to add the Olympic host city curse. Beijing is showing all the symptoms of suffering from the same 'Olympic curse' as Athens and Sydney. The name "Bird's Nest" may turn out to be truly prophetic. Beijing smashed the spending record for the 2008 games by budgeting $23 billion, nearly twice what Athens laid out two years ago. At least four (Sydney, Montreal, Barcelona and Athens) Athens GREECE, oh has this country been in the news lately. i visited beijing the year before 2008. WOW couldn't explain the massive construction, building and pollution. something is up with this government, not speaking the truth. plus they continue to dis the dalai lama and continue it's assault on tibet.
bbartlog says:
The big downpayments might seem like they help, but if people can also borrow that money through other channels (family, etc.) it may not be any use.
in that case, the families will step back in and bail them out by paying the monthly payments. Do not underestimate the concept of family in china and elsewhere. The concept of retirement is not the same either - you do not see that many old farts playing golf all day in 1,000/month clubs there. most of them stay in house, eat chicken fried rice and watch politics on TV.
Cnina just doesn't have enough history of private property rights to justify these valuations. Strangely, if more property rights do get codified then prices will fall as supply rises to meet demand. No win situation.
Japanese GDP revised down.
Japan’s Economy Grows 3.8%, Less Than First Estimated (Update2) - Bloomberg.com
Advant Guard: Revised Japanese GDP
If we get a second dip in Japan and Europe, just as China is tightening their monetary policy...
Anyone know if residential mortgages in China are recourse loans?
I just read through all the comments and I don't see what generated the "CougarWorld" dating service ad.
rajesh, you do not need to link to your homepage, I find it pedestrian.
ztexas wrote:
The answer is yes, with a bullet.
So if an extended family saves up to buy, then they all get wiped out in the bust. There's the chain reaction right there. Can you go BK in China, or do they just shoot you?
Michael Kleist offered a good perspective on what is happening in China housing.
However, I'm more concerned with what's happening in my little part of California.
Looking at the UE statistics just published for the four incorporated towns in the area, I see 22.3%, 16.1%, 18.8% and 17.7%. This is an area of only 300,000+ people or so, but those numbers are staggering, much worse than California's 12.5% and virtually twice the national average of 9.7%.
I've heard that all politics is local. I don't know about that, but I do know all economics is local.
Scone said
Can you go BK in China, or do they just shoot you?
I think thats what they call Chinese carryout there
About Korea, from 1982-1990 I worked with a Korean-American war bride. Married a GI stationed in Korea and then moved back home with him, had 3 kids, bla bla bla...anyway, she would send $50 a week back home for her parents and brothers. She also traveled back home every other year and would take suitcases of Nike shoes, which I guess were next to impossible to get at that time back in Korea off base. In 1991 she and her husband retired (He drove a truck for UPS) and they lived like royalty on both their pensions! A co-worker kept in touch via snail mail, and some of the pictures that Hia sent back proved the point. I guess that $50/week was used to buy quite the home and other property, and the shoes were black market gold. Hia passed away in 2006, but in closing, she was the hardest working person that I've ever met in my life
Nope, no bubble here...
Speculation has become common. Wang Zhongwei, a 35-year-old stock market analyst who owns the apartment where he lives, bought two apartments in 2004 for investment purposes. He borrowed from family and friends to meet mortgage payments twice as big as his take-home pay. But in the middle of last year, he sold the apartments for twice what he paid and made $145,000, a fortune here.
In China, fear of a real estate bubble - washingtonpost.com
does anyone else feel a bit odd that the original CR post introduced fixed conversion currency rate residential property prices in meters based on an inner circle friendship with a B2B tech link.
not that Ive been sitting here for an hour parsing the posts.
The Mindblowing Bubble In The "Miami Of China"
If they can, sure. But if people think that something is a sure thing, that prices will never go down, and so on, they may commit in excess of their family's ability to bail them out. Ultimately I'm sure any MBS backed by these mortgages will sell at a premium founded on these ideas (family bailouts, harsh recourse measures and so on), and many will still turn out to be trash because you can't get blood from a turnip.
bANK fAILURE wrote:
If you know of any way to put graphics in the comments, I would be grateful.
kicker wrote:
I suppose with 50% down payment norms, in the event of bubble popping, family and friends potentially will stand to lose money as well, unlike here in the US.
At least they are cracking down on third mortgages. Wait, third mortgages???
China Regulator Said to Seek to Curb Third Mortgages (Update2) - Bloomberg.com
"Feb. 2 (Bloomberg) -- China’s government, seeking to stem property speculation, told banks to raise interest rates on third mortgages and demand bigger down payments for such loans, a person with knowledge of the matter said. "
Will the Chinese gov let them lose money? A 100 million broke and BK people is a lot of bullets. Someone or someplace will need to be a scapegoat for it too.
I do not think that the place for imbed graphical interface should reside in this particular format.
Ghost,a third is nothing,I saw a 32nd mortgage in the 80's here in CA.
Regardless, CPI and PPI in China just released. Higher than expected. Highest inflation in 16 months.
OTOH, with a billion people, you could do extend and pretend for a very long time indeed. Barring
The quoted price is per sq meter. I would guess that's about the rates in Mumbai
Property Rates in Mumbai | Property Real Estate Rates
When you are popping 79K people a square mile, the housing is going to be very small. I would very much speculate that housing cost in China is predominantly ground rent.
Beijing: Population & Density by District and County
Another interesting link...
China Special (5-3): Chinese property market is wrong-supplied rather than over-supplied. « U.PRO.FISH
Drop into Google Translate the link on multi-generational loans
you want the edit, you cant handle the edit.
:Fuck you, You cant do what I do:
-random movie quote of the day, Jeff Portnoy, Tropic Thunder.
SNAFU wrote:
This kind of has me scratching my head...
Assume the US had 50% down payment requirements but the 50% down payment was typically loans from friends, family or PayDay lenders. When the bubble burst the banks would have been much better off but would the economy?
Sounds very similar to the 1920's in the US but with housing instead of stocks.
kicker wrote:
Would be, I suppose, like the internet bubble popping in the US. Not as morally hazardous as banks needing bailing.
SNAFU wrote:
Social hazard, methinks.
Proposed Fare Increase and Policy Changes Effective May 1, 2010
A fare increase will be required to help close a budget gap approaching $300 million next fiscal year.
Why is there a budget gap?
* Federal stimulus and other federal funds, which were used in FY10, will not be available next year.
* Fare revenue is down due to declining ridership.
* Higher expenses due to inflation, higher fuel costs, contractual obligations and other factors.
* State assistance will be lower due to a projected $11 billion State budget shortfall.
Bus
**NJ TRANSIT bus and contract carrier fares would increase an average of 25 percent** , subject to rounding.
* The base one-zone local bus fare would change from $1.35 to $1.70 and the base one-zone monthly bus pass from $49.00 to $61.00 in northern New Jersey and from $45.00 to $56.00 in southern New Jersey.
* Bus Ten Trip ticket discounts would capped at no more than 15% off comparable One Way fares.
Rail
**Rail fares would increase 25 percent** , subject to rounding.
* The Off-Peak Round Trip (ORT) discount would be eliminated.
* Rail fares on the Main/Bergen County and Pascack Valley lines would be authorized to be raised to levels that provide parity with pricing on other similar-distance NJ TRANSIT rail lines, based on future changes in Metro-North fares in New York State.
New Jersey Transit
I would think total social hazard. Which would be seen as threatening to any type of government. Also, any government would be looking for someone to focus blame on other than themselves.
isn't chicago and ny trying to pass sugar fat taxes?
"I think the prices are out of whack, but I don't think there is mortgage credit bubble link it the U.S." -CR
The bubble is not in home prices but in the levels of foreign investment and domestic reinvestment flows coming into the country. It is worse than a simple property bubble it is an economy built purely on pillars of sand. There is no real "chinese economy" until domestic consumption decouples from the government spending
NJ Transit data: http://www.ntdprogram.gov/ntdprogram/pubs/top_profiles/2007/agency_profiles/2080.pdf
Passengers pay 40% of operating costs.
SNAFU wrote:
In a somewhat mischievous line of thought, we could hire Indian call centers to do the collection calls on the defaulted loans.
RD I have lost all faith in US mass transit. Soon others will too.
One thing that keeps surprising me is people keep claiming that equity is a panacea against decline or collapse. The countryside is dotted with towns that are no more. There are many towns that didn't make it out of the 1800s, hardly the heyday for 100% mortgages.
"Howdy do you do Sir"
"Yes I am calling on behalf of _____
". You think you hate those calls now...
Why does the China bubble economy make me think of Japan twenty years ago? Hmm...
I asked a friend living in China for his thoughts ... this is his view:
the link.
TradeSparq.com China's Suppliers, Manufacturers, Importers and Exporters Social Network
nova wrote:
If by that you mean that families will lose their life savings and its after effects, its hard to say! Its China after all, where folks whose Children died in shoddy school house collapse after earthquake, were almost brutally suppressed from protesting. Its all for the greater good you see!
ghostfaceinvestah wrote:
Casey Serin must be pissed he wasn't born Chinese.
Uhhhh, so twisting the levers continuously makes for a stable market ? All of a sudden 40% down when existing loans have 10% down. I don't think that works too well, wondering what the government will do next to screw you. We'll see but it sounds like a formula for consumer & investor frustration to me..
True SNAFU.
You and I look at these prices and say: "No property rights? No inheritance? At that price? Forget it."
Chinese see the same prices and say: "SOLD! Where do I sign?"
While there are no property rights as we know them in the West, all the Chinese I know here in Shanghai (I've lived here nearly six years) have grown up with guaranteed housing. Many of the occupants of new housing received those homes as replacements for homes they were required to vacate for new construction (this government's equivalent of market-value compensation for eminent domain seizures). Others bought in early and have enjoyed paper profits through inflation.
So none of my friends and colleagues in Shanghai can be persuaded that property isn't a good buy. They do not believe they will ever be foreclosed on and dispossessed because it would be such a departure from government policy heretofore.
Rob Dawg wrote:
True. However, I take the Northeast corridor line which apparently, is the only line which pays for itself. It sucks that we have to take the 25% hike as well.
But there really is no other alternative into the city. Even with so many mass transit options, it is almost impossible to drive into the city during peak hours.
pelekus wrote:
What do they think will happen if they can't make the payments?
In a mature market, mortgages are a stop against poor decisions. If you go to the mortgage broker and they tell you they won't approve a loan for your prospective property, that is likely due to superior knowledge of the local market. In the end, there is no panacea for poor decision making, be it by the buyer or the lender. In the ideal free market, the people that make poor choices bear the burden for those choices. This is not happening here, because the ones that made the poor choices have cashed their bonus and commission checks long ago.
Kansas City, Mo., closing nearly half its schools - Education- msnbc.com
District is seeking to erase a projected $50 million budget shortfall
iceman wrote:
But families in China don't live in 2700 square foot homes.
They are happy with 270 square foot homes.
badger wrote:
And spent it on new counter tops.
Where to being. I also lived in China,Taiwan and Vietnam and am married to a Taiwanese. Obviously your friend does not understand China or Chinese money. In general they normally pay cash its surprising they are taking out loans from banks at all. And not I said loans from banks. Chinese have and extensive informal banking system via friends and family and thence to less savory characters all they way to the real mob. I suspect you will find for example that the real estate agent arranges for a loan for the 40% down via the informal banking system. Eventually if you follow the money you will find that its source often was a personal loan or business loan to a high government official who redirected the money to lend it into the shadow banking system for profit. In other words these are actually zero down loans 60/40 with the 40% having interesting terms and often a high interest rate.
Think about a congressman in cahoots with the bank he is directing taking out loans to get involved in real estate and both getting a cut of the higher interest rates and you get the picture.
Now you don't have to be a genius to figure this out if it was really cash then people would be draining their savings accounts to buy homes and the savings rate would be plummeting banks would be unable to meet reserve requirements and lending would dry up rapidly. Thats not happening therefore its borrowed money.
Every vote counts. Unlike US political elections and American Idol
The city is awash in bad debts. No-one has ever said this to me out loud, but people act as if the natural end state of a loan is to be written off. I lot of the money walking and driving around the streets here is the fruit of gifts and favors disguised as "loans." I don't know whether that's what people are thinking or not, but no-one ever asks the natural question as you have.
badger wrote:
That is so important. Until recently conventional wisdom held that your banker, in refusing you, was passing judgment on the quality of the proposed loan. Did the retail borrower understand disintermediation and what it did to that truism?
memmel wrote:
I am reminded of the saying 'may you live in interesting times'!
pelekus wrote:
Then the bank takes the hit? Or is there some sort of gift that makes the loan go away?
I really don't understand a loan that it is assumed will not be paid back.
a most incredible post, CR
most incredible
keep this sort of stuff up and the world will beat a path to your door
josap wrote:
Never, the government bails out the bank and everyone lives happily ever after. They still haven't paid off the bills from the last bad loan episode.
and all is rosy in USA
- NY Times
KANSAS CITY, Mo. — The Kansas City Board of Education voted Wednesday night to close almost half of the city’s public schools, accepting a sweeping and contentious plan to shrink the system in the face of dwindling enrollment, budget cuts and a $50 million deficit. In a 5-to-4 vote, the members endorsed the Right-Size plan, proposed by the schools superintendent, John Covington, to close 28 of the city’s 61 schools and cut 700 of 3,000 jobs, including those of 285 teachers. The closings are expected to save $50 million, erasing the deficit from the $300 million budget.
Watch more and more states go to extreme cost cutting measures because the decline is REAL and look for the
memmel wrote:
The real acid test - good point.
josap wrote:
Oh, come see! There are lots of commercial loans like that here. But Rajesh is right on this from the bank's perspective on residential mortgages.
Rob Dawg wrote:
2/3rd of operating costs go towards salary and benefits.
Wonderful post memmel. Thanks.
I second that memmel, thanks.
Jonathan wrote:
Well I happen to plan on buying a home for "cash" once prices collapse but I assure a good bit of the cash will come out of my wifes family banking system. I'd much rather pay the inlaws than a banker. Its a good thing when its real family cash however its still a loan. I might as well add I have a pretty good idea how much the "family" has and its measured in 100k amounts. Compared to Americans its a lot of money but also its not. And this is Chinese money from tiawan where they have been saving aggressively since the 1960's primarly out of fear of a Chinese invasion. Most mainland Chinese have not even had the chance to save significant amounts of money till the late 1980's at the earliest in general much later than that for most. Look at the average income levels and at best you have a few decades of savings.
So regardless of how much they save most only have say ten years or so of real savings accumulation. You can readily do the math using existing data on incomes and savings rates etc and your talking about around 100k or less for most of the savers very very very few have more cash than that saved up. Sure the average older Chinese has 50k or more in savings but you would also if you did not trust your government. But 50-100k of savings does not support the property bubble we are seeing.
For that matter you can also look at money flows in the private banking system from overseas chinese back to relatives in China to speculate on real estate. There is and immense amount of money but its all borrowed via the shadow banking system.
There is and absolutely fantastic book I read many years ago when I lived in China that did a great job of explaining the flow of capitol in and out of china via the overseas chinese community. I had the pleasure of working with very wealthy Chinese and going with them from Taiwan to Singapore to Shanghai and they explained directly how the money flowed bypassing Taiwanese investment constraints. Vancouver etc etc.
Understand however that not only can this flow stop suddenly at the first hint of trouble it can and does reverse itself rapidly draining capitol out of china faster that you can imagine. China could collapse in a matter of days.
CR does not understand that it was this shadow banking system that was spooked that stopped the flow not the actions of the Chinese government itself its the fact it spooked the shadow banking system.
When China collapses it will be awe inspiring if its because the tanks are rolling again the speed will blind you.
And of course the irony is that Chinese Government officials play the same game with swiss bank accounts and houses in California, New York, Vancouver and England ready to bolt like everyone else when the music stops.
Memmel, fascinating post. Thank you.
Flats in downtown Shanghai can sell for RMB150,000 (US$ 22,000) per square meter with exclusive homes in prime locations commanding even higher prices.
Even assuming US $10000 per square meter and 50 sqm for a small house, it would require US $500000 for a 50 sqm flat. Assuming interest rate of 5% it means a simple interest of USD 25000 per annum. It means if the person is going to paydown the principal he should be re-paying more than USD 25000 per annum.
Therefore I don't think you are using the right parameters while viewing the bubble. The parameter to be used is not downpayment but median housing price to median income ratio. While downpayment will tell you the risk (for lender) it does not tell you anything about affordability. In China banks have to lend irrespective of the risks, further making downpayment an ineffective assessment tool. Affordability makes it clear whether the house prices are unrealistic or not.
Doing some maths we get as under:
Assumptions:
Flat price = USD 500000
Thus Median Income should be = USD 167000 (500000/3)
Is this the median income in China .. I would not know
If so there is no bubble!!
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The original blog post stated prices at RMB 150,000 per sq. meter. This is like a Park Avenue location. Average housing cost for Shanghai is US$ 2,700/sq. meter (as of March 9), or about US$ 250/sq. foot.
As you can see, the average numbers tell a different story.
We are going to see large increases in property values with periodic declines over the next 10 years at least. However, there are a few reasons housing prices should continue to increase:
Never mind looking at the housing prices alone, look at the price/rent ratio instead. I have seen reports that the P/R in Beijing is over 450 for even modest dwellings. Do not forget that for positive cash flow, the rule of thumb is that a rental should be purchased for 120 times rent, or at the very highest 160 times rent (monthly).
Try a little back-of-the-envelope calculation:
100m2, $2700/m2, is 270,000 for a condo apartment. 270000/160 is $1688 required rent. Given that a typical office worker in Shanghai makes perhaps 3000 RMB, or $450, the rent would be > 3x their income, or about 10x what they can really afford.
I think these numbers tell exactly what the story is with chinese real estate prics. The chinese citizenry is Crazier Than Californians (TM).
This will not end well.