Thursday, August 13, 2009

WSJ: In China, Land Prices Fan Bubble Fears

Yawn. Just another bubble... as we mentioned yesterday [Aug 12, 2009: E-House Holdings Benefiting from China Housing Bubble v2.0] I suppose bubbles are now just part of the landscape as governments' work their magic. [July 28, 2009: - China Warns Banks Over Asset Bubbles] Ride it, and just make sure you have a chair when the music stops. Again, I will laud the Maestro for teaching the world how it's done; his disciples have taken his precepts and taken them to new heights. He must be proud of his ground breaking work. [Feb 16 2009: Is China Pulling an Alan Greenspan?]

  • Land prices are on the rise again in China, as easy credit helps reverse last year's correction but also raises concerns that another bubble could be in the making. When a property boom in China came crashing to a halt last year, purchases of land by developers for new projects began drying up. But this year, the area of land purchased has risen every month from the previous one.
  • And in recent weeks, as a recovery in housing sales continues to strengthen, property developers are again paying top dollar for empty lots in China's biggest cities.
  • Analysts attribute the turnaround in land prices to the flood of credit that has entered China's economy in recent months. "Land sales have been going crazy in big cities, particularly in Beijing, and regulators suspect a lot of that money came from banks," said Karen Tang, a partner for law firm White & Case LLP in Shanghai who specializes in banking and real estate.
  • "The bubble is getting bigger and bigger," said Alan Chiang, head of mainland Chinese residential property in Shenzhen for the property broker DTZ. He said the trend is encouraged by local governments, who earn revenue from land sales and hope an upturn will refill their coffers. (hah, that sounds very familiar)
The main difference between the 2 countries seems to be their regulators and officials seem to get worried about the bubbles and try to pop them in mid stream occasionally, whereas ours have a policy of saying "it's all good as long as asset prices are inflating" OR "since we are not good at spotting bubbles we cannot do anything about it - we'll just clean up the mess afterwards with ... well, more cheap money." I remember when stock margin levels in the US were at record levels in late 90s and people were calling for regulators to raise margin requirements as the NASDAQ gained 10% a month... but nope. Whose to say there was a bubble after all? The market was going in the right direction after all. ;)
  • The speed with which developers are paying peak-level prices for land has fanned concerns among policy makers and analysts about a bubble. Bei Fu, Standard & Poor's Ratings Services' main credit analyst for the Chinese property sector, warns that many developers "continue to have a potentially risky appetite for expansion and land acquisitions, largely supported by an aggressive equity culture." Ms. Fu warns that should the trend continue, a "policy backlash," combined with a broader downturn, could cripple developers' balance sheets.
  • Regulators are in a delicate position. They are loath to stifle recovery in a sector that can spur growth in other industries, and which has underpinned a rise in the country's wealth. On the other hand, the last run-up in property prices pushed many home buyers out of the market and stretched developers' balance sheets to dangerous levels.
Like I said earlier this week, this lending in the 1st half 2009 is so egregious it actually has me concerned for the impact of growth in China somewhere in the out years (2? 3 years?) when all these loans come home to roost. [May 27, 2009: How is China Spending their Stimulus Money; and How many Loans will go Bad?] At least the Chinese bailouts will be paid out via surpluses, rather than what had to be done here.
  • Throughout the summer, land purchases by developers and state-owned enterprises have continued at a rapid clip. Ten of China's most prominent developers spent about 10.7 billion yuan on land purchases in June, a 74% jump from the month before, according to data from property broker Centaline Group. Others, including Hong Kong-listed CC Land Holdings Ltd., are raising equity to fund more land purchases.
74% one month jump... nice.
  • The rush to buy land echoes what happened in 2007, when a number of developers focused on expanding land banks to lock up future revenue. A number of big property developers overextended themselves and approached the brink of collapse. Some of those same developers now are back in the market.
  • "It's remarkable; in a lot of other economies these companies would have gone to the wall and crashed," said Ashley Howlett, a property lawyer with Jones Day in Beijing. He said "prices are about the same or even higher than they were in 2007."
Well it's a lot like NASDAQ in 99, China's stock market in 07 or US housing in 06. You know there is an end game, and it won't be quite so nice. But if you don't partake you will be deemed a permabear, doomsdayer and in the investing world, be prone to lose your assets as people rush into the funds of those who partake gladly! Of course those type of funds imploded in 2000-2002, and 2008 but nevermind that - that's old history.

Boo Yah Alan Greenspan world. Boo Yah.

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