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China Real Estate Bubble Bursts with Violence
October 30, 2011
China Real Estate Bubble Bursts with Violence
By Mike Shedlock
10/29/2011
The property bubble in China has finally burst. Denial has turned to anger as Shanghai Homeowners Smash Showroom in Protest Over Falling Prices
A group of around 400 homeowners in Shanghai demonstrated publicly and damaged a showroom operated by their property developer after the company said it cut prices. Home buyers had wanted to speak with the developer to refund or cancel their contracts but were unsuccessful, according to local media. One report said the price cuts exceeded 25% per square meter.
The local media reports said an unspecified number of people were injured.
Chinese media separately reported that another group of Shanghai homeowners gathered on Saturday to speak with Longfor Properties Co., after it dropped asking prices to 14,000 yuan per square meter from 18,000 yuan per square meter at a residential development in the city’s Jiading district.
The Shanghai property-owner demonstration found little support on China’s Internet, where most still expressed worries that housing prices are too high.
22% Drop Overnight
The drop from 18,000 to 14,000 yuan is a 22% overnight drop and that is just a down payment on the carnage that is coming.
Housing Math in China
* 18,000 Yuan per square meter is about $2,835 per square meter
* One square meter = 10.7639104 square feet
* Cost per square foot = ($2,835 ÷ 10.7639104) = $263.38
In downtown Shanghai, the price is 48,000 yuan per square meter or roughly $696.77 per square foot.
I am told these are for roughly finished units (no carpeting, appliances, etc), just stark bare units.
For more on absurd Downtown Shanghai property prices, please see Property Developers Hurting in China; New Homes Sales Down 50% in Shanghai; Preposterous Prices Won't Last; Commodities to be Hit in Building Slump
Protests Hit China as Property Prices Fall
Yahoo! Finance has additional protest details in Protests hit China as property prices fall
Hundreds of angry home buyers launched a series of protests in China's commercial hub of Shanghai this week, as owners decried falling prices for their properties, state media said Thursday.
In the latest incident, some 200 home owners on Wednesday besieged the sales office for a project of leading developer Greenland Group, demanding refunds.
"We require a refund because the loss we are suffering now is too great for us to afford," the Shanghai Daily quoted a protestor as saying.
He paid 17,000 yuan ($2,678) per square metre last year and claimed the developer had cut the price by around 30 percent to boost sales.
In a another incident, 30 home owners stormed the sales office of a project of Hong Kong-listed China Overseas Land & Investment Ltd. on Wednesday, the Global Times said, repeating a similar protest from over the weekend.
Demand for apartments has been falling after authorities, fearing a property bubble, banned the purchase of second homes, increased minimum downpayments and trialled property taxes in some cities -- including Shanghai.
At the same time, property developers have been hit by a lack of funds, as the government hiked interest rates and restricted bank lending to rein in surging inflation and bring real estate prices into line.
Ratings agency Standard & Poor's expects China's property prices to fall by 10 percent nationwide over the next year as the measures take effect.
S&P 10% Decline Prediction is Hugely Understated
Prices in many places are already down 20 to 30 percent and things will get to the 50 t0 70 percent decline mark before this is over.
"Twilight Zone" of Phony Accounting and Shadow Money
MarketWatch says Watch out for China’s ‘freak’ economy
Ten years ago, homes in Shanghai sold for about six times an average family’s income. Today that’s 13 times. Shenzhen has gone from five times to 14 times. These are off-the-charts absurd ratios. This is a bona fide mania.
And it works fine until the music stops. Where are we now?
Prices have started falling. Now, fewer than 46 of 70 major cities saw prices stall or decline in September, reports the National Statistical Bureau. As recently as January the number was just 10.
In the past two and a half years, China has witnessed a staggering credit bubble. Total lending has come to about $7.8 trillion.
To put this in context, that is twice the entire net government debts of the European so-called “PIIGS” — the troubled countries of Portugal, Ireland, Italy, Greece and Spain — put together.
An alarming report from Schroders said Chinese banking operates in a “twilight zone” of phony accounting and shadow money and it’s all coming apart. “Almost half of all credit creation in China is off balance sheet,” wrote the team at Schroders.
They think this situation could unravel “over the next three to six months,” producing a huge crisis with international implications. Most Chinese banks, they predict, will end up as “zombie banks.”
Hard Landing Coming
The Financial Times reports China property developer warns on price falls
China's largest real estate developer believes the country's property market, a key driver for the economy, has turned and expects conditions to worsen in the coming months as sales prices volumes decline further.
China Vanke, the country's biggest developer by market share, said government efforts over the past year to rein in soaring prices were having a severe impact on the market and developers were being squeezed after sales volume in 14 of the country's largest cities halved in September from a year earlier.
A 30 per cent drop in property prices would precipitate a collapse in fixed investment in China and the country's investment-driven economy would experience a so-called hard landing after years of annual growth above 9 per cent, according to UBS economist Wang Tao.
Property investment accounts for more than 20 per cent of total fixed investment in China and UBS estimates almost 30 per cent of final products in the economy are absorbed by the property sector.
"A property-led hard landing scenario is quite likely in the next few years, even though we do not think the property market is about to collapse now," Ms Wang said.
Debt-laden provincial governments in China rely heavily on land sales for revenue and have poured investment into commercial housing projects in recent years.
These local authorities also account for up to 30 per cent of all outstanding bank loans, many of which are collateralised by land and housing developments, so a collapse in the property market could have a devastating knock-on effect on the financial system.
The property bust is underway in China and will spread from city to city just as it did in the US. No city will be immune and commodity prices will be smashed in the downturn.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Mike Shedlock
Mike Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management.
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