Chinese Banks Get Around Lending Limits on Property

Buried in an article about the stress tests was this little item:

Drive to cool China property boosted

Although all banks in China are to varying degrees owned by the state, some have been chafing under the government’s property restrictions and have used loopholes to evade them. For example, banks are obliged to demand at least 30 per cent downpayments on mortgages, but some branches have offered generous overdraft facilities to help borrowers get around that.

BTW, the banks were declared secure enough to withstand a 50% drop in prices. Leads one to wonder if they included these little tricks in the analysis. Of course an overdraft facility is probably unsecured. That's better, right?

Based on total investment numbers, house prices in 2nd and 3rd tier cities are more than making up for the small declines in the first tier.


More Chinese cities see property prices fall as result of cooling policies

According to data released by the NBS last Wednesday, real estate investment grew by one-third to reach 2.63 trillion yuan during the first six months of the year.

Despite three interest rate hikes this year, developers have continued to invest in the real estate market, secured by the handsome profits they have raked in from previous sales.

Facing harsh restrictive purchase policies in larger cities, developers have shifted their focus to the country's second- and third-tier cities.

Non-first-tier cities saw their prices increase the most last month, with growth rates between 1.78 percent and 2.72 percent, according to NBS data.

China Economy Falls into Contraction Territory

HSBC's Purchasing Managers' Index (PMI) for June showed the economy on the cusp. The Flash PMI for July shows real contraction. (On the June data release the New Export Orders Index is also the lowest it has been since the the GFC.)

This goes along with this article on the neglected (Small and Medium-sized Enterprise) SME sector.
Money Crunch in China Forces Wave of Small Business Failures

Wenzhou City, a coastal manufacturing hub in China’s southeastern Zhejiang province, can serve as a benchmark for private enterprises in China. By early July, nearly 20 percent of SMEs in Wenzhou had shut down due to disruptions in the capital chain, the Yangtse Evening Post reported.

The business environment for SMEs is even worse now than it was during the 2008 global financial crisis, according to the latest survey by the All-China Federation of Industry and Commerce (ACFIC), which covered 16 provinces, including Guangdong, Zhejiang, and Jiangsu.

. . .

Due to the national macro-control policy, bank loans are biased towards large state-owned enterprises and national key projects. It is very hard for SMEs to obtain bank loans.

Also apropos is this article about the health of loans issued in the black market.
Bad Loans Surge In Chinese Underground Banking System

. . . interest rates they are charging can be as high as 8% per month (i.e. almost 100% per annum), it is hard to see how these businesses can be alive. With rising exchange rate of Chinese Yuan, surging labour and material costs, now these businesses are facing surging financing costs. It would be surprising if none of these businesses fail.

And better yet, companies getting turned away as too risky.
China’s Loan Sharks Turning Away Small Firms

Despite the added costs and risks, business owners told the Hong Kong daily they were turning to loan sharks out of desperation to prop up sagging cash flows – only to be rejected, they said.

“They are now aware of the default risks and reluctant to lend to struggling businesses,” one Ningbo-based businessman said.

More than 7,000 companies have been forced to close in Zhejiang this year, the result of slumping sales, inflation and rising interest rates, according to the People’s Daily, Beijing’s flagship newspaper.

Australia's Shadow Inventory

I like this, Chinese style sniffing around the supply data to get another view on the statistics. These activists used water usage data to determine empty properties.

Flippers do tend to hold inventory off the market, especially if prices are inching downward and they are holding out for better times. Good luck with that, by the way.

Speculators 'locking up' empty dwellings that could be homes

The group's Speculative Vacancy Report says that in Docklands, almost a quarter of residential properties there, 23.32 per cent, are vacant. The official vacancy rate for Docklands is 3.62 per cent.

Other established suburbs with many empty homes, according to the report, include East Melbourne (18.64 per cent), Carlton (11.51 per cent) and Essendon North (13.07 per cent).

Dubai, How Bubble Created Unmanageable Commercial RE Ownership Stratas

The bubble attracted many smaller than usual investors, resulting in patchwork ownership of commercial real estate. And despite the equivalent of nine empire state buildings (and rising) in empty office space, larger companies BUILD if they want to expand in Dubai.

Diced Up Dubai Office Towers Frustrate Big Clients With Tangle of Owners

Negotiations with multiple landlords tend to be long and frustrating, said Ian Albert, regional director at property broker Colliers International. Even when a majority of a building’s owners agree on rents and terms, one will often hold out for a better deal, knowing that the tenant is eager to complete an agreement, he said.

Nice Overview of the Reverse Mergers Trouble

A Bit OT, but a solid article covering the trouble with Chinese companies raising money in the U.S. by pulling on the mantle of a defunct, but still registered, company, like pulling on the hide of a dead animal.

China to Wall Street: The Side-Door Shuffle

But over the last few years, Rino International and scores of other young Chinese companies slipped into the United States stock market through the back door. Rino’s American stockholders later lost hundreds of millions of dollars when accusations surfaced that the company had fudged its books. All told, investors’ losses on these Chinese ventures have stretched into the billions.

The amazing thing about these stories, and they all seem to feature the inability for even large Wall Street players to do due diligence even to protect their own best interests. Except over the extreme short term.

Ouch, Demoted to Selfstyled

Baines at the Vancouver Sun further reflected upon Ozzie Jurock. And he has gone from Real Estate Guru Ozzie down to selfstyled real-estate expert Ozzie

That's gotta hurt.

Perth Prices Continue 15 Month Slide

Much hangwringing going on. The market top for Perth was March 2010. Inventory is slowly shrinking, days on market is slowly climbing (although still well inside buyers' market timing at 82 days, probably why the prices are holding up as well as they are). The forums are full of investor-owners pulling houses off the market because they aren't getting the price they want, ever hopeful the vastly overpriced market will firm up if they wait a bit. Every ounce of momentum, aside from the fickle flights to safety going on in the global markets (keeping bond rates down), is against a recovery. Every one of them. Good luck with holding out. Your neighbor who has to sell should send you a thank you card. Flowers too. And a bottle of wine, even.

Record 15-month decline in Perth house values

According to preliminary data from the Real Estate Institute of WA, the Perth housing market dropped 2 per cent in the June quarter.
Once final sales data is collected, REIWA expects Perth’s median house price to settle at $475,000, a level not seen since December 2007.

REIWA has previously called on banks to drop their interest rates, which could be enough to jumpstart WA’s stagnant property market.

Interest rates won't change the total available credit if foreign appetites for Australian debt don't cooperate.

I really like the headline below. Because, of course, the logical response of a prospective buyer right now is: why not just wait until I get an even better deal? Gotta nip that kind of dangerous thinking in the bud.
Perth house prices unlikely to fall lower Their logic is based on the notion of trade-ups being easier.

Alan Bourke from the Real Estate Institute of WA says activity at the bottom of the market should keep prices stable in the short term.

"There's quite often a knock on effect as people in that market then trade up," he said.

Back to the first article:

Mr Bourke said that according to the initial data, there was increased sales activity in the $350,000 to $500,000 range, with activity in other price segments falling.

So, the median may indeed remain stable, but that's only because hopeful sellers of >500k properties capitulate and price them <500k to move them. The mix at the "affordable" range will begin to include sweeter properties, but the median may indeed remain the same.

25% of Local Government Debt in China Due by End of Year

I don't think we're going to have to wait long to see how the local government debt in China is going to play out. Under-the-table loans made with little oversight backed by the overvalued land and few revenue streams to pay it all back. How's that for a mix?

Tackling local government debt from China Daily

The 10.7 trillion yuan is not a small number, and 80 percent of it comes from bank loans. More than half of these debts have to be paid off between 2011 and 2013. Indeed local governments will have to race against time, as about 25 percent of their loans have to be paid off before the end of this year, and 17 percent next year.

In the first half of 2008, the total amount of local government debt was just 1.7 trillion yuan. At the end of 2010, the figure was up to 10.7 trillion yuan, which was equivalent to 27 percent of China's GDP in 2010, according to the National Audit Office.

So, revenue streams to pay back this debt, anyone?

Finally, we should further expand the range of real estate taxes and fully apply a property tax. The property tax collected by developed countries has already become an important part of public finance at both the state and local levels.

All good in sentiment, but that's probably not going to happen by the end of the year to a degree significant enough to pay back $400 billion. Can local governments toss the balls into the air one more time and sell enough land to cover?

China Executes Two Vice Mayors for Real Estate Related Graft

Real estate related graft and embezzlement.

China executes vice mayors in corruption crackdown

Xu Maiyong, who served as the vice mayor of Hangzhou, had used his official power to interfere with project contracts and help companies acquire land, the Supreme People’s Court said in a statement. He had accepted 145 million yuan (US $ 22 million) in bribes, and embezzled 54 million yuan (US $ 8.3 million) from a government-managed property company. Xu was removed from his post in April 2009.
. . .
In an unrelated case, Jiang Renjie, the vice mayor of Suzhou, another prosperous southern commercial centre, was convicted of taking 108 million yuan (US $ 16.6 million) in cash from property developers.

Vancouver Weekly Sales Numbers Continue Downward

Again, dipping into Agent Will's numbers.

The discontinuities in the chart are, in order, (most likely causes, that is) two mortgage rule changes at CMHC and Canada Day.

Added: This will be the end of the weekly numbers as Will has decided to move on. The Canadian Zillows can not come soon enough.

China's Local Government Debt Looms Over Portfolios

Using overvalued property as collateral for real estate loans. Nothing could go wrong with that.

China’s $2 Trillion In Local Lending Raises Questions About Funds

“In China, as in the U.S. before the collapse of the subprime mortgage market in 2007, local debt is backed by collateral that is overvalued, may be hard to sell and, in some cases, doesn’t exist,” wrote Bloomberg in a recent report.

These estimates put local government debt higher than the Chinese national debt.

China Expands Purchase Limits to 2nd and 3rd Tier Cities

No slacking on tightening measures. Repeating the pledge to build more affordable housing, but it's unclear where the funding will come for that.

China Expands Home-Purchase Limits

Housing transactions in major cities have declined in recent months following a series of anti-speculative measures. However, transactions in second- and third-tier cities have increased due largely to investors moving further inland where the restrictive policies aren't as rigorously enforced.

"Purchase restrictions in some first-tier cities are having an effect and big property developers are starting to cut prices. So the government probably wants to take the restrictions to other cities to curb speculation," said Michael Klibaner, Asia-Pacific regional director at Jones Lang LaSalle.

Australian Clearance Rates, tempted to ignore

Clearance rates grew very noisy a few months ago. I switch to smoothed charts to combat this, but I've grown leery of bothering to post them due to increasing questions about the quality of the data. Here is the latest smoothed chart (smoothed over 4 months), just for the heck of it. Take it for what you will in lieu of the article below.

July 3 2011 Clearance Rates Melbourne Sydney Adelaide Brisbane

Agents withhold house price data

The investigation also revealed that 43 per cent of properties scheduled for auction in June had no published quote range, further frustrating buyers' attempts to obtain basic information. With Melbourne's clearance rate slumping over the past year - only about half the properties on offer are selling under the hammer - agents are increasingly refusing to disclose information about failed auctions. The passed-in price, vendor's reserve price or both were withheld for 20 per cent of all properties that were passed in last month.

I continue to be amazed at how little public information about properties is available online in Australia and Canada, in comparison to the U.S., where tax rolls, previous sales, and sometimes mortgage information, are just a few clicks away, for anyone to get, for free. Not that the added transparency prevented a bubble in the U.S., but for the due diligence buyer, the options for self-education are much better here.

Deutsche Bank Assesses Australian Bank Future Real Estate Losses

Hedge funds are already shorting Australian Banks. Now the analysts are piling on. But what of these tepid non-responses from the banks? Get your act together, guys.

Of course they let 60% of their loan book end up in residential real estate, so they haven't been paying much attention to anything, it seems.

Australian Homes May Cost Banks $7.5 Billion in a Year, Deustche Bank Says

Australia’s biggest banks may lose about A$7 billion ($7.5 billion) from a 30 percent drop in home prices and a 9 percent default rate, Deutsche Bank AG said.

The banks face losses ranging from A$61 million in the mildest scenario to A$41.7 billion in a year, the report said. The smallest loss would result from a 1 percent default rate and a 10 percent home-price decline, while the worst-case scenario is based on a 15 percent default rate and a 60 percent plunge in housing values, Deutsche Bank said.

Still, Commonwealth Bank, Westpac, National Australia Bank, ANZ Bank and Macquarie Bank Ltd. face a A$223 billion “gap” as they seek to meet Basel’s net stable funding ratio, with National Australia Bank having the biggest shortfall, the Deutsche Bank analysts wrote.

Crumbling around the Edges

Reality is settling in more firmly around Vancouver's fringe.

Average housing prices on decline in Greater Victoria

With inventory rising in all housing categories and reduced sales activity, the average selling price of a detached bungalow in the second quarter of 2011 fell 4.8 per cent year-over-year to $495,000, the survey said.

"We're not seeing a lot of movement in the Victoria real-estate market, so inventory is up," said Carol Geurts, from Royal LePage Coast Capital Realty. "However, the average price decrease for most homes was less than two per cent."

Not sure how to translate this. The "median is different from the average," or "only distressed homes are selling and the non-distressed ones we are assuming would hold their value better."

Believe it or not, at the beginning of the burst in California, realtors would argue the following with a totally straight face: "Well, the value of houses for sale is dropping, but what about the value of houses that aren't for sale?"

We'll be generous and assume they are referring to the median, given that we already know that high end properties are suffering more than the rest.

"In many of Canada's regional markets, we saw house prices appreciate at a significantly faster rate than wages and salaries, and this trend cannot continue indefinitely," said Phil Soper, president of Royal LePage Real Estate Services.

Whoa. Is this what happens when realtors discover Red Bull? So shocking to see the obvious just stated like that.

China Econ 101 Smackdown of Australia

Striking tone is right.

China right now is the drunken gambler who has been rolling well for an hour and thinks he can't lose. They bailed out their entire system just back in 1998/9. That special banking facility, after an entire decade, couldn't offload more than 20% of the junk they had to acquire to prop up their banking system. So, here they are, flush from yet another bailout from daddy, staggering from the casino tables, lecturing Australia on opening their markets.

China slaps 'limited' economy

''Australia's infrastructure bottleneck and shortage of skilled labour are hampering Australia's economic and trade development, and also limiting China's investment in Australia."

Chinese investment in Australia has been especially contentious, with the Senate yesterday launching an inquiry into foreign investment in agricultural land.

A Chinese state-owned mining company investment in Shenhua Watermark Coal in NSW is the latest concern, following the 2009 saga over Chinalco's failed bid to take over mining giant Rio Tinto. Mr Ouyang said Australia would benefit from more competition in its market, either from home or abroad.

Well, on the upside, satire was already dead anyway.

Crash and Burn

Blog at Forbes fails to mince words.

It's been a busy week in China. Yet another rate hike. Moody's sniffing around 1/2 trillion $ in off-balance-sheet, poorly documented, local-government lending . . . Every round of this, you'd think the fat lady would finally find her breath mints and take her spot in the wings.

How China will Crash and Burn

I often hear the argument that China will not have a real estate crisis of U.S. proportions because home and condo owners have to put 30-40% down when they buy. So where do people get the money to buy a house that costs, on average, 8 times their annual income (a figure several times higher than in the U.S.)? Some of it comes from savings, and some comes from borrowing from relatives.

Let’s pause for a second. In the 1990s, the Chinese banking system basically collapsed. To revive it, the Chinese government took bad loans from banks’ balance sheets and put them into off-balance-sheet vehicles (Enron would be proud of that financial ingenuity). Banks started to function as though nothing had happened. To finance the off-balance-sheet assets, the government set deposit interest rates at very low levels: 1% or so. In a country with a very high savings rate and 5% inflation, this resulted in a 4% annual loss of purchasing power.

Vancouver Price Change Chart for June 2011

Whoo hoo. Party on. The picture has changed a bit. In the detached listings, most areas have returned to bubbling in price above the inflation rate with the usual suspects pulling the rate of growth very high.

The gap between detached and overall continues to widen, but the rate of increase has shifted upward for attached too, but that is the result of a small handful of areas: Richmond, Van East and Van West for detached (8.8, 10.6, 8.7% up on the year vs. 6% overall) and Richmond and West Van for apartments (7.2 and 14.5% up vs. 3.5% overall). For apartments, remove the high flyers and they are returning gains below the inflation rate.

If we break down detached by area and smooth over four months, we get the following chart (below). Areas of high growth in price:

Richmond (which appears to be topping out. The REBGV tossed out that oh, it's balancing because it lost $25,000 in value since last month. Really, guys, it's come to this. Houses in Richmond lost 1/7 of the average house price in the U.S., in one month, and that's a "leveling off".)
Van West (Rip roaring)
West Van (likewise)
Burnaby
Van East (Our old reliable "average" gal)
South Delta

The rest are making yearly returns close to or below the inflation rate.

Vancouver Weekly Sales Turn Down

Still waiting for the June numbers from REBGV to show up in the usual places. In the meantime,
Agent Will's Weekly Stats shows a similar shift to the average numbers.

Why is inventory falling at the same time? (One might ask if this is not just a blip but a trend.) Remember, real estate is unlike most markets. Sellers are also buyers and buyers are also sellers. If a potential seller finds themselves priced out of buying a move-up property, they also cease to be a seller. They will only return to the market as a cash-out seller, with no buying contingency, if and when the market makes a definitive turn downward, at which time inventory will rise as prices fall.

Another Housing Bubble in London

One signal of a housing bubble is buyers paying too much for amenities they could add themselves much cheaper. California was rife with this where granite counters which would cost 35k to install would increase the price 100k-150k. The same is happening in London, where amenities with known fixed costs, like wine coolers or a building squash court, are disproportionately increasing the "value" of the entire square footage. The London twist on this is shared amenities, but still, increasing the cost per square foot by 500£ to cover a doorman's salary and a screening room is buying frenzy territory.

Luxury’s Not Enough for Elite London Homebuyers

“Luxury isn’t enough,” Miles-Brown said by telephone. People using “words like prime, super-prime and uber-prime are looking for ways to redefine the word luxury.”

This sounds suspiciously like China's ever more creative property advertisements.

Vancouver June Average Numbers Down

A stumble or the start of a fall or just the vagaries of average numbers? (Waiting on the REBGV numbers for something more useful than the average.)

Vancouver is the last holdout in BC according to the province-wide numbers so a dip would be no surprise.

Yatter Matters Blog

The average price for all three Vancouver residential housing segments had an ‘oops’ moment. The question on many minds will be whether the market has tripped or stumbled?

Local Bulls vs. Foreign Bears

Nice summary article, although they neglected to mention the recent rapid *growth* in household debt. It's not just that consumer debt is high, but that this isn't the normal state of affairs, other positives aside. I don't know how the Australians are hanging on now, imagine carrying a 155% debt-to-income load (higher than the U.S. and Canada) at Australian interest rates, not at essentially zero % interest rates. Yowsa.

Australia’s Home Price Slump Pits Local Bank Bulls Against Foreign Bears

In the end what will sink the market is the foreign lack of appetite for Australian mortgage debt coupled with declining household creation. Interest rate increases need not apply.

Rental Listings in Australia Up Significantly

As the blog entry postulates, this is possibly the result of household rollups. Analyses in the U.S. missed this factor in their predictions of the impact of a downturn on inventory. People like to eat, and put gas in their car, they will crowd in with others to reach these goals and shortages will vanish in an eyeblink. (If they ever really existed. House flippers while they are flipping, act as a repository for shadow inventory. And a rising market has a lot of flippers.)

Rental listings on the rise

Stats from RPData posted on the Macro Business Blog show there are 22.8 percent more properties advertised for rent than a year ago. In the Northern Territory, the figure is closer to 77 percent, and in South Australia, 40 percent.

Hat tip: Aussie Roy at Greaterfool

Shilling on the Commodity Bubble

The best cure for high commodity prices is high commodity prices. And once they start to fall in earnest, there are a number of feedback loops that will drive the prices down fast.

Brazil, Canada, Australia will all suffer from the price drop.

Shilling: China Heading for a Hard Landing, Pt. 5

I’ve long believed that a hard landing in China would be preceded by a price collapse in copper and other industrial commodities. Copper prices peaked in February, and Barrick Gold Corp. (ABX)’s agreement on April 25 to acquire copper producer Equinox Minerals Ltd. to gain mineral resources outside its area of specialization is a classic sign of a peak.

As I noted earlier, there is so much leverage money floating around the world that regardless of how it’s managed -- by fundamental, momentum or technical strategies -- it tends to end up on the same side of the same trades at the same time. So, when one of these positions reverses, the effects spread rapidly as speculators bail out of their positions to reduce risk and preserve their capital. Keep in mind that the prices of the wide variety of commodities continue to move in lockstep.