How Much do you think Chinese housing and land prices will fall ?

[Green King]

The argument i got in with my friend who owns a lot of land in China partly through factories he own partly through the apartments.

I was saying that he should sell them while they are high so he can by them back when the market falls.

He thinks it will only at most fall 30% and since the land and real estate he owns has gone up by at least 100% its not worth the bother.

He also state the cultural value of owning a home and the fact the Chinese government has been trying to have a slow decline. And for the most part everything is under control. 

 

Anyways i was wondering how this Board though about the subject ?

How much do you think Chinese housing and land prices will fall when China start to slow down ?

And why?

;D

[alertmeipp]

where in China?

Be specific.

 

[Green King]

For my friend or for the poll ?

For my friend Shandong Province.

For the poll overall.

 

I don't it to get too complex as in tier one, tier two, tier three and tier four.

 

But I expect more drop on the lower tier cities since their market are built more speculation therefore will depend more on the physiology of the market and credit availability. 

[alertmeipp]

For my friend or for the poll ?

For my friend Shandong Province.

For the poll overall.

 

I bet many of us don't even know how much it went up.

Mind you, many places in China is still un-developed and u can grab land for free if u want to manage it... that's at least true about 10 years ago.

[Green King]

For my friend or for the poll ?

For my friend Shandong Province.

For the poll overall.

 

I bet many of us don't even know how much it went up.

Mind you, many places in China is still un-developed and u can grab land for free if u want to manage it... that's at least true about 10 years ago.

 

Well what i see leverage has been abused extremely in China and most of the properties that has value has been much inflated.

For a Chinese business man a good deal in terms of assets are ones that break even that that he can take advantage of the appreciation.

People are getting rent returns of around 2% to 3% of their home value.

 

 

I am just wondering what kind of numbers are you thinking of in terms of mental models or actual models in terms of decline.

(Since most of the Chinese rich's money are in real estate and most of them are heavily leverage as the governmental almost always give loans for land etc. in the private sector.) So a decline will mean a lot of wealth destruction.

And no one has a idea of wealth protection in China. Only people that have money are the coal miners and the corrupt politicians. (who are to scared to spend it all) most of the other are in land. homes and other hard assets. (based on the people i know)

[Packer16]

Based upon the late 1990's bust real land value fell from 20 to 55%.  That was even in non-depreciating countries like Hong Kong.  There are two offsetting factors more leverage and more foreign reserves held by China.  Clearly land will fall by more than home prices.

 

Packer

 

 

 

[HJ]

Isn't it somewhat of a meaningless statistic?  Even just for yuks, is it in USD or in RMB? 

 

The last real estate cycle in Shanghai peaked in 1992, bottomed in 1999-2000 in the aftermath of the Asian crisis.  Back then market was different for foreign and domestic buyers, the foreigner market fell from 30,000 RMB per square meter to 7,000-10,000 RMB  per square meter, but RMB also devalued against USD by 50%.  The domestic buyer's market didn't really quite exist, but basically fluctuated between 1,500 RMB - 3,500 RMB per square meter throughout.  But in the end, the government support to the real estate market was such that the cost of purchase can be used to offset your taxes.

 

This cycle will clearly be very different.  Can't extrapolate from past experience.  I'd expect that before it all ends, government will interfere heavily to exercise price control in an RMB denominated market.  A big chunk of the price action will also be reflected among the interplay between domestic inflation rate (however interfered that may be by government as well) and USD exchange rate.  But that subject has become so political that it's really hard to say how much pressure can be let off from that channel.

 

 

[Baoxiaodao]

Thanks HJ for the thoughtful post. I want to point out that if the housing price remains unchanged, the real estate will depreciate 10-15% a year in real value because of the inflation. With the massive printing in China, it is hard to imagine the housing market will go down in nominal terms.

 

 

Isn't it somewhat of a meaningless statistic?  Even just for yuks, is it in USD or in RMB? 

 

The last real estate cycle in Shanghai peaked in 1992, bottomed in 1999-2000 in the aftermath of the Asian crisis.  Back then market was different for foreign and domestic buyers, the foreigner market fell from 30,000 RMB per square meter to 7,000-10,000 RMB  per square meter, but RMB also devalued against USD by 50%.  The domestic buyer's market didn't really quite exist, but basically fluctuated between 1,500 RMB - 3,500 RMB per square meter throughout.  But in the end, the government support to the real estate market was such that the cost of purchase can be used to offset your taxes.

 

This cycle will clearly be very different.  Can't extrapolate from past experience.  I'd expect that before it all ends, government will interfere heavily to exercise price control in an RMB denominated market.  A big chunk of the price action will also be reflected among the interplay between domestic inflation rate (however interfered that may be by government as well) and USD exchange rate.  But that subject has become so political that it's really hard to say how much pressure can be let off from that channel.

 

 

[Packer16]

What the statistic was meant to show was the decline in real housing prices after a debt induced financial crisis.  It is from Rienhart and Rogoff's study of financial crises.  How this compares to China today in terms of magnitude is dependent upon how overvalued housing is compared to these crises.  I am not familar with the details enough to make an estimate but the range provides an order of magniturde guess.

 

Packer

[HJ]

Things in China in general is very opaque.  Often even Beijing doesn't have a good handle on what's actually happening far from the center.  They keep a reasonably tight leash on places like Beijing, Shanghai, ShenZhen, but I bet things like Ordos or South China Mall probably only crept up to them through foreign media.  If they can enforce something like "we won't register a transfer of housing title if price / square meter is greater than 15,000 RMB", it won't be hard to imagine them saying down the road that "we won't register a transfer of housing title if price / square meter is less than 10,000 RMB".  Often times only people very close to the situation has a good handle on what the real market is.  For that matter, I don't even trust the currently reported prices.  Developers were hiring actors to stage scenes when they open a development for sale.  Half the apartments were pre committed, whether it's bribery or as compensation for moving the old residents out of that locale.  They put a price tag of 60,000 RMB out there on the rest, and just wait for fish to bite.  Much like "painting the tape" here on some thinly traded stocks, they can paint the tape there on apartments.  In fact, one thing to note is that because of the lack of a truly free capital market, real estate over there serves some of the monetary function (store of value and medium of exchange).  When you call real estate over there, you are calling something that's much closer to monetary and currency policy than their counterpart in the West.

 

Because of the highly controlled nature of the economy, free market phenomena as described ala Rogoff and Reinhart can be distorted for a very long time, not that things are 100% free elsewhere over their study period either.  On the other hand, China started from such a low base, a lot of what has been gained over the past 30 years will be retained.  I'm not a raging bull or a gloom and doomer on China, I just think that trying to quantify things there, especially on a nationwide scale in market terms is an extraordinarily difficult, and somewhat futile exercise.