Monday, April 14, 2014

1987 Redux?

In the mid-80's, Japan was on top of the world--the second largest economy in the world and rapidly overtaking the United States. And then a lot of things went wrong, including a collapse of the Japanese real estate market.

A lot of people have been predicting for several years that the Chinese real estate market was overbuilt and faced a collapse, yet China somehow avoided the bubble popping. However, Gordon Chang, writing at Forbes, thinks that the bubble may have finally popped:
The real estate market in Hangzhou looks like it has just passed an inflection point. It is not so much that fundamentals have deteriorated—they have been weak for some time—as that people’s mentality has changed.

As state-run China Central Television explained, the problems in Hangzhou, once the world’s largest city, began on February 18. Then, the North Sea Park development began offering deep discounts. Rumors that the developer had cash problems started a chain reaction across the city. It did not matter that North Sea Park issued denials. Other developers began offering either deep discounts or large incentives, but the tactics did not work. By then, there were almost no buyers.

Now, the problem of no buyers is spreading across the country. Sara Hsu notes China’s residential markets are becoming inelastic. “Once consumers stop buying,” she writes, “deep discounts are ineffective in drawing them back.” People aren’t buying because they believe prices will decline further.

According to the National Bureau of Statistics, new home prices across the country are still going up, but percentage increases have now declined for three consecutive months, signaling a peaking.

Official statistics do not seem consistent with the general trend of reports, but in any event severe problems are evidently ahead. The secondary property market has tumbled, with sales falling by more than half in Q1 2014 from the same quarter in 2013. Speculators have either left the domestic market or have sold off holdings. Rich Chinese, now interested in foreign holdings, are also shunning their home market. Foreigners, who own only an infinitesimal portion of China’s property but who are a bellwether nonetheless, are investing at the slowest pace in at least a decade. Middle class Chinese are also largely out of the market.

And that’s not all. China property trust sales plunged 49.1% in Q1 2014 from the previous quarter, from 99.7 billion yuan in Q4 2013 to 50.7 billion yuan. The precipitous fall was due in part to the failure last month of developer Zhejiang Xingrun Real Estate, which had 3.5 billion yuan of indebtedness.

Moreover, just about everyone expects more developers to close their doors. ...
Read the whole thing.

(H/t Instapundit)

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