Ox, Shmox, It's Gonna Be A Pox. Why I Have No Faith In Chinese Real Estate For 2009.
First, let me get my biases/perspectives out on the table. I am a lawyer. What this means is that no matter how much the media may tout me as riding some sort of second wave (check outthis super-cool article!), my training compels me to look at everything with a jaundiced and conservative eye, particularly investments.
I never lost a dime on the dot.com bust because by the time I was thinking I might at some point get comfortable enough to invest in a business I could not foresee ever developing a way to make a profit, the crash had already occurred. Many years ago, when my law firm (that's my money too) rented a condo in Qingdao and then in Shanghai, I looked at buying property in China, but always blanched. Though I saw China's long term potential for real estate, what with some 200-300 million more people expected to fill China's urban areas and all, I could never get past the rows of empty buildings and the fact that the rental rates were way too low in proportion to the selling prices.
I mention all this so everyone will know that I am a coward when it comes to investing and so can blame that on my completely not buying the idea that 2009 is going to be a good year for real estate in China, no matter what Sam Crispin is telling us. Sam Crispin owns and runs a real estate consultancy practice in China, which no doubt means he knows more about China real estate in his little finger than I do in my entire body. Nonetheless, I am not buying what he is selling.
In a China Herald post, entitled, "Rebound in China real estate expected in year of the ox," Crispin tells us to expect real estate in China "to rebound over the coming twelve months as the central government is reversing its policies." He goes on to say that he expects "most of the government measures brought in to control the property market since 2004 to be reversed in stages." He sees "government intervention to support the market ... as "cause for optimism."
Wrong, wrong, wrong. First off, the government measures that were enacted to control the market were not that big a deal in terms of pricing. Yes, there were measures that limited real estate buying by foreigners, but those measures were enacted more for PR reasons than because they would have much downward influence on pricing. And those measures are still in place in any event. Yes, the government did enact a tax measure or two in an effort to slow down speculation, but if China property were red hot right now, buyers would be blasting through those like a fleeing bank robber going through a 25 mile construction zone when fleeing the scene.
Secondly, I just cannot see China's government literally intervening to support real estate. Yes, they may loosen the restrictions on foreign buying a bit and yes, they may reduce taxes on sales a little bit as well, but that is not really "intervention" and I do not think these things will do much more than move a few extra people to buy. I do not see government loosening as leading to much in the way of China real estate price increases.
So what we really need to look at to determine China real estate prices in the next year is supply and demand. And it is on the demand side that I see problems. The world economy is down, obviously. China is not going to be completely decoupled from that. We have already seen China's economy decline. In particular, China manufacturing is on the ropes as product orders from overseas continue to fall. This economic and manufacturing decline is negatively impacting the Chinese consumer. We can debate by how much, but it has to be having a negative impact, it just has to. Foreign buyers who a year or so ago would have rushed into China real estate at any sign of a loosening of foreign buyer restrictions are cash and credit poor now and far more wary. Leading buying countries like Singapore, Taiwan, and Hong Kong (I know it is technically a part of China) are hurting. k98My firm's clients who a year ago would nearly always ask me about what it would take for them to buy "something" in China, virtually never bring that up any more.
From where is the demand going to come that is going to support/raise China real estate prices in 2009? I just do not see it.
Do you?
UPDATE: Mr. Crispin was kind enough to send me his company's full report on China real estate and that report can now be found here. It is an excellent report, and far more nuanced than can be described in a short post. Though it is more optimistic than I am about China real estate, its predictions are certainly within the realm of reason. The report also makes clear (and I wholeheartedly agree) that just because China real estate is and will be down, does not mean real estate in every China city must share in that fate.
Comments (17)
Read through and enter the discussion by using the form at the endTony - January 27, 2009 8:46 AM
The fact that Crispin is in real estate is another reason not to trust him. RE agents always say it's a good time to buy: "Buy now before you priced out", "Price are lower now, buy now before they go up", etc.
Your method of looking at price vs rent is a good one. Another good one for the US (might not apply as much to China) is medium home price vs medium income.
Justin - January 27, 2009 11:04 AM
Great post and from what I can see here in Shanghai, you are absolutely right. Nothing is moving. Not condos, not offices, not anything. People here are starting to hunker down and save even more and that does not mean buying properties. If this is happening in Shanghai, I would guess it is worse in most other places foreigners might consider.
Joel D - January 27, 2009 1:35 PM
Thanks Dan. Great stuff.
Glen - January 27, 2009 4:57 PM
I translated/edited a China real estate survey in 2007. The main problem at the time was that wealthy people were buying up condos and apartments but not actually living in them (i.e. buying for investment purposes) and hoped to flip them for profit. You had a peculiar situation where occupancy rates were low (lots of empty buildings) while low and middle income families had trouble finding places to live. Worst of all, new land was opened up by kicking people out of existing buildings and 拆-ing the old neighborhoods, only to build apartments that the previous residents couldn't afford, apartments that would remain empty.
Perhaps we'll start seeing the insane situation where people buy real estate and actually use it for its intended purpose?!
Unless you are actively engaged in the business of owning, managing, maintaining and marketing condos/apartments, it's probably best to put your money elsewhere.
Scott Loar - January 27, 2009 5:52 PM
Only one thing has changed since the last time you brought up this real estate topic - the situation has worsened.
Boriga - January 27, 2009 6:51 PM
Much as almost all of what the article and respondents said is predominantly true, (about a certain segment of the market), however it has very little to do with what Sam Crispin actually said in his research piece that is being lambasted.
Sam refers to the prospects for the China property market as a whole across secondary and tertiary markets and that of the listed property developers. He is not writing an article on whether it is a good time for lawyers to buy high rise premium downtown apartments, which clearly it is not, and to which Sam would no doubt agree.
Before repeating the last received mantra it is best to check the actual facts.
Furthermore, the idea that the China government is not willing nor wishes to promote the real estate and construction sector, shows a poor understanding of past policy making, or an appreciation of the potential impact and importance on the domestic economy of greater home ownership. The government has actively promoted this sector before and is doing so now and will in the future. In particular, Chinese banks are lending very aggressively to home buyers and given the policy effect time lag Sam's comments seem very prescient of the overall market potential in 2009.
Paul Salo - January 27, 2009 6:53 PM
Great article. Your clients hesitancy to invest is wise. The Chinese gov incentives are like throwing a hotdog down a hallway. In August, Morgan Stanley put their crown-jewel XinTianDi properties up for sale after accurately predicting a China property meltdown. As of today, nothing has sold. Profits are down at Chinese developers and banks. (Big surprise there?) As you stated, the ROI is and will remain very low for Asian properties. Shanghai's priceless French Concession properties have already started dropping. In the top end of the market, if your heart is set on a moderne or art deco properties, the combo of loosening foreign restrictions and drop in prices is a rare opportunity Paul shanghaimaison.com
Greg - January 27, 2009 8:11 PM
"Hunkering down and saving". The whole world is doing this. The Economist said that US consumption still accounted for close to 60% of total global consumer activity and people here only spend on dining. I live near the Cherry Creek Mall in Denver and high end retailers are offering 50% to 70% off of nearly everything. And to pay for infrastructure upgrades, the state of Colorado is actually increasing sales tax. Properties are moving but the vast majority are below 300k and many are foreclosures, short sales and auctions. Above 500k its stagnant. Madoff and three other several hundred million dollar pyramid schemes (some of whom invested in Madoff, haha) have all collapsed, wiping out untold sums of paper wealth. The banks are still so sick there is open talk of nationalizing.
Consumerism as we know it is finished and I imagine that once respectable lending begins to occur, home owners will live in one place for a long time as the Depression babies did. Living in one house most of your life and paying off the mortgage in 20-30 years is how you make a great ROI, not flipping, fraudulent property valuation and hype.
Dan - January 27, 2009 10:38 PM
Boriga,
Nobody is "lambasting" Crispin, we are merely disagreeing with his predictions. You and he may very well be proven right.
You say we focus on one real estate segment, but beyond your mentioning 2nd and 3rd tier cities, you don't explain the markets you allege Crispin was referring. All I can tell you is that a client of ours wrote me an email from Qingdao saying that real property values there are falling and that countless buildings remain completely empty. Qingdao is obviously just one 2nd tier city, but I would think it is pretty representative.
I never said the Chinese government would not be encouraging real estate purchases and, in fact, I think it will do so. What I said is that government incentives will not be enough to influence prices in a meaningful way.
I truly hope you and Mr. Crispin prove correct, but if it were my money at stake, I would sit out pretty much the entirety of China's real estate market for quite some time.
Twofish - January 28, 2009 2:29 AM
There is some ambiguity here about what it means to "rebound." It's quite possible that prices will drop enormously but that the volume of sales will go up as people go bargain hunting.
Sam Crispin - January 28, 2009 3:21 AM
Great debate everyone. It occurs to me though from some of the comments that not everyone, Dan this includes you (and thank goodness for you Boriga), has actually read my full report. Forgiveable of course and you may send me an email to get a copy, samcrispin@cpcproperty.com . Just to remind you I did say prices will go down 15 to 20% on average before a rebound takes place in 2H 2009, I did say the year of the Ox will end better than the year of the Mouse - we better all hope it does! None of this is particularly bullish. The other key point is that China is not one market, Shanghai is not one market, there are various different things going on in different regions, cities and neighbourhoods. None of this is rocket science of course and we have been here before.
Would love to take all these comments one by one, nothing is moving, French concession houses, apartments etc but may have to come back to do that later.
Just one comment for Tony who thinks that we shouldn't trust people who work in real estate to comment on the real estate market (not a bad place to start actually), but does this mean you don't use a lawyer Tony? After all they are in law and therefore by your thinking untrustworthy for legal advice, but from your comments lawyers are now experts in real estate it seems. Of course you don't mean that, the trick in all these things is to find someone with integrity to work with. Anyway, please do read the full report and then comment again...
Roger - January 28, 2009 10:22 AM
I don't about buying but as renting goes, in looking at apartments recently rental prices have plummeted. Rental prices are down easily at least 25 percent and if you are renting and want to bump up the ladder to a new level while still paying the same price, this is definitely a good time to do it. Agents are still giving the "meiwenti" line when you mention how much prices have plummeted yet the difference this time is that nervous look in their eye.
len - January 30, 2009 10:17 AM
I remember not too long ago when the Chinese were laughing at America about how stupid they were in their financial decisions that led to
the recession.
Now they are singing a different tune when its hits their homeland.
Just wait awhile Chinese property market will
tank just like US did.
Sam Crispin - January 30, 2009 8:18 PM
Len, Just for your information, Chinese regulators have for the last 4 or 5 years been implementing policies to slow their economy and particularly their real estate markets. Mortgages have always been limited at maximum 60 to 80% loan to value with 60% applying to the higher value properties, yes there has been some small scale mortgage fraud but it has not been institutionalised as it has in the US and UK. Many, 30 to 50%, Chinese home buyers do not have mortgages at all. Thus one may say that Chinese regulators have been doing their job while US and UK regulators have been out to lunch with the very people they are supposed to have been regulating. We are all in the same sea but China is in a different boat, still intact and no holes below the waterline.
NT - January 31, 2009 8:06 PM
I fully agree that there just aren't any reasons for the residential property market to go up any time soon. Everything points in the opposite direction. From an investment standpoint, there are three reasons I would not buy property in China.
(1) The disparity between rental income and selling price suggests that residential property is still quite seriously over-valued, at least in Beijing and Shanghai, even if yields are bound to stay low as long as broader investment options remain limited for most Chinese.
(2) Quality is another problem. How many of China's new apartment blocks will still be "homes for tycoons" or "glorious residences" in 20 years' time?
(3) Another problem is that you are only buying a 70 year lease, irrespective of any legal rights you may have beyond then. This probably won't matter much in practical terms, but it ought to have a bearing on selling prices. I don't have any evidence, but my gut feeling is that the market, being very new in China, prices residential property as if it were freehold.
ddjiii - February 2, 2009 8:19 PM
Much as I enjoy CLB, I'm with Crispin on this one. As others have noted, the original article as not one of those ridiculous realtor puff pieces but a reasonable prediction of what the overall market will do in the next year.
The most serious fault I saw in the criticism was the idea that the government has little control over or interest in the real estate market - I think this is demonstrably false. Contrary to CLB's assertion, it's not just regulations on foreigners (which it's true affect too few people to concern the market as a whole) or "a few taxes here and there." The central government has a number of powerful tools at its disposal and has been using them, including capital gains taxes, mortgage rates (including separate rates for second homes/investment properties), mandatory down payments, etc. When it pulled all these out early last year to reign in the housing market and control inflation, the market halted on cue. Since then, of course, the global economy has changed the situation and the government is now loosening controls to boost demand. Whether it will be enough to counteract a sinking economy is anyone's guess, but for sure they will have an effect. And as the construction and real estate industry is considered critical to meeting GDP expectations, you can bet the government will do everything it can to support them, even allowing local governments to purchase market rate units for public housing, which has already happened in a few locations.
Finally, don't discount the strong belief many Chinese consumers have that the government can move markets. When the government says it will now encourage the housing market, many Chinese - rightly or wrongly - take that as strong evidence that the market will improve. (Same goes for the stock market.) And remember that most Chinese don't have alternative choices for investment other than the domestic stock market.
None of this is investment advice, it's economic forecasting. If you're relying on national housing forecasts to guide your decision on whether to purchase a particular apartment, well... good luck.
grubby - February 5, 2009 1:48 AM
This is a great converstaion to have over a case of wine (by the way, have you tried Shanxi's Grace Vineyard's?)!
A few observations from here in Chongqing.
We have forests of skyscrapers with no one living in them.
It's said that most are sold - I find that difficult to believe.
Developers are now very nervous.
Few locals can afford - or are prepared to part with - more than 4000 RMB per sq m.
Government officials, state owned industry bosses, academics can seem to benefit from huge discounts - as was explained to me. So there are plenty of tales of these preferred folk being able to buy.
I know of one higher end development where appartments were selling for around 10,000 RMB / sq m earlier in 2008 and are now being offered for around 7,000.
Banks and officials are worried that those who bought high will demand a rebate or else just hand the keys back and kiss the mortgage goodbye!
Growing number of developers - even those listed in HK - have stopped work and sacked all employees.
As for buying in China, why not?
Certainly in second tier cities if you believe that you will be there for the long haul.
Here in Chongqing, rentals on the more up-market tower blocks are not that cheap: around 7000 RMB / month. Though, I must add that I used to rent a 3 bedroom appartment in a blue collar development for 1600 RMB per month !
But I wanted a bit more space for my family, a garden, privacy, peace and quiet, no shops under my balcony, fewer smells and no cockerals waking me up at 5 am etc.
And the only rentals that would give me that were in the region of 30,000 RMB per month.
Actually, in Chongqing, many execs still stay in 5 star hotels. Must cost their shareholders a lot of money !
Anyway, as I pay my own way, I bought !
I've got around 240 sq m. I paid 4000 RMB per sq m. Decorating - up to 1000 RMB / sq m was a nightmare. But this is subject of another story !
Anyhow, I ended up with something better for my family, "for the long haul" (another grubby is due in August), and I paid for it 2 years ago when the exchange rates were more favourable.
I have one of the few domestic ovens in Chongqing - so roasts are on the menu! And,I have far more creature comforts than one usually ends up with renting in this neck of the woods....unless you pay big bucks.
I don't regard this purchase as an investment -though it could be said that it IS an investment in my sanity !
Incidentally, on my development of 200 homes, around 20 families have moved in !! One similar home sold for 8000 RMB / sq m undecorated some 8 months ago. But with everyone slashing prices, my guess is that an undecorated property today would be lucky to fetch 6000 RMB / sq m.
So, my advice from the hinterland, if you're here with your family, get your own territory if you plan on staying for a while (5 years plus) - be canny in your purchase, weigh up the outlay versus comparable rental - but don't bank on big returns.