Wednesday, April 15, 2009 Chinese Property Prices to Halve Over Next 2 Years

Shhhh! I see green shoots....

While the Chinese government is following in the Greenspan playbook [Feb 16 2009: Is China Pulling an Alan Greenspan?] - pushing loans through banks even as their is a capacity glut (just build something! anything)... as I asked yesterday I wonder what exactly the performance of these loans will look like in a few years. With the export market in disarray and US consumers facing a structural reality check, what exactly are we building? More real estate? More factories (when current ones are shuttering left and right?)

Just one analyst's take and of course I recommend ignoring it as it doesn't fit into the green shoot mosaic - the stock market is about the tree right in front of you, not the one in the distance. Or the forest. Now of course this would fit perfectly into my own thesis of the double dip recession, interspersed with a flood of government paper printing... but I digress.

  • Property prices in China are likely to halve over the next two years, a top government researcher has forecast, in a strong sign that the country's economic downturn faces further challenges in spite of recent positive data. The property market and exports were leading drivers of the booming Chinese economy in the past decade and slumps in both have taken a heavy toll.
  • Cao Jianhai, professor at the Chinese Academy of Social Sciences, a government think-tank, said a rebound in the property market was unsustainable and driven by a flood of liquidity and fraudulent activity rather than real demand. (I assume this will be the last we ever hear of Mr Jiahhai) ;) He told the Financial Times he expected average urban residential property prices to fall 40 to 50 per cent in the next two years from the levels at the end of 2008.
  • "Prices may not fall in the near term but I expect a collapse starting next year, followed by many years of stagnation," he said. Mr Cao is known as one of the "three swordsmen" of real estate because of his influence as an official economist. (hmm, gonna be hard to stifle him if he has that much sway. But if we cannot stifle him we can drink Kool Aid and ignore him)
  • Average urban housing prices across 70 cities fell 1.3 per cent in March from a year earlier but were up 0.2 per cent from February, according to figures released yesterday by the National Bureau of Statistics. That broke seven months of declines and was accompanied by a rebound in transaction volumes.
  • Residential property sales rose 8.7 per cent in the first quarter from a year earlier in terms of floor space sold, compared with a fall of 20.3 per cent for all of 2008. Estate agents in Shanghai said the market seemed to have bottomed as a result of stimulus measures, falling prices and pent-up demand from owner-occupiers.
  • Mr Cao said preliminary government investigations had turned up examples of developers using fake mortgages to offload apartments on to the books of state-run banks. (sounds vaguely familiar - we call them liar loans here but the government investigations usually happen 3-4 years after the fact. Chinese catching them already? So efficient) The latter face enormous pressure from Beijing to increase lending rapidly to boost the economy. (sounds vaguely familiar)
  • Sales are also being driven by pent-up demand from urban residents, but Mr Cao said many were jumping into a false rebound because they have not seen house prices drop before.
  • The volume of empty apartments across the country hit 91m sq metres at the end of last year, up 32.3 per cent from a year earlier, according to official figures. (solution? build more - got to get those steel mills humming again at any cost )
  • At a national level, average housing prices tripled between 2003 and mid-2008 and are now 10 to 12 times the average income. That meant 60 per cent of homebuyers' monthly income must go to mortgage repayments, Mr Cao said. (sounds reasonable and sustainable - umm... where have I heard that before?) [Sep 26, 2008 : 15% of Americans Spend 50%+ of Income for House Payments]
So my friends, let us enjoy the prosperity that is raining down from the Far East. Clearly the government statistics signal rebound so we must raise our glasses of Kool Aid and never look under the surface. Thankfully, money creation has no boundaries - the same "Greenspan" solution can be done in any country which is willing to print, print, print and create "paper prosperity". Paper has no borders.

This is all setting up very nicely with the late 1920s/early 1930s model - an epic credit led downturn, thought "solved" in relatively short order by powers that be.... with stock market singing higher as "all knowing market" confirmed the solution(s) had been found.... before the true scope of reality was revealed behind the curtain. And the market said oops once more - we're not so all knowing. Hmm... how interesting indeed.

Again folks, the more you know or investigate the more you laugh at the absurdity of buying almost anything. But to make money we have to suspend reality for long periods of time and "play the game" - so indeed, despite all this evidence, we know the market (all knowing) will ignore it. So we'll clap like seals, and "buy those Chinese and commodity stocks" since that's what the herd will do as "great economic data" emerges from China. But we will do it with a twinkle in our eye and shaking our head at the Great Casino of New York City - where the less you know (or acknowledge) the better off you are. Because being intellectually correct when the herd says the complete opposite - simply does not make a lot of money. Mobs rule.

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