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12
Aug
2010
Pretty Bubbles in the Air E-mail
City Life - Real Estate
Written by Daemon Borek
My wife came to me at the end of Spring Festival this year and exclaimed, “I think we should buy another house.” We talked it over for a bit and I agreed to go shop around and see what was out there. I was against the idea, for reasons I will get into later, but went along anyway because she has proven to be smarter than me on numerous occasions. After several weeks of looking around and literally reading anything I could get my hands on about the housing market in China, I vetoed the plan. Here are my reasons.

Before we get into the nitty-gritty though, let’s get one thing perfectly clear. I am not an economist, my father was a CFO for numerous companies in the US for 25 years, and spent the last 10 years consulting for small and medium businesses looking to expand and/or merge with larger companies. Unfortunately for my brother and myself, the apples fell far from the tree, rolled down the hill, ended up in a river, got fed into the ocean, and washed ashore in Asia.

So everything I am saying in this article is from my own common sense and opinion. Both of which have conspired against me in the past and this could just be another example. But, I think I’m getting this one right.  

Vacancy

 When I first moved to Xi’an, I lived on the western edge of Gaoxin on a dirt road that was all farmland. Hard to believe and I wish I had taken pictures as proof but you will just have to take my word. When the high-rises started going up, my Finnish friend and I started walking “The Loop” for fun in our spare time. “The Loop” starts in Gaoxin, goes to Xiaozhai, then to the Bell tower, and then South West until you find yourself back in Gaoxin. This is just under 20km, takes all day to do, and has been the best way to find the hidden gems in Xi’an. We were commenting on the rapid development of the city and as it got dark we noticed something.

Every high rise we walked past had about 10-15% of its lights on. Granted, not everyone is going to be home at 8:30pm on a Saturday, but still 10-15%? That seemed crazy until economist Andy Xie’s article “Fear empty flats in China's property bubble” recently estimated that there is a “vacancy rate in urban China (of) 25% - 30%”. This is roughly 64.5 million vacant homes able “to house 200 million people”. This story didn’t get much play in either International or Chinese Media, but it was attacked by several authors for exaggerating the numbers and not taking into account that most of those vacant homes are 20+ years old and set for demolition. I urge you to take an early evening stroll around Xi’an and decide for yourself which version to believe.

Speculation

I had to go to Beijing this spring to re-new my passport and was chatting on the train with a guy who was born in Xi’an and has been living in Beijing since graduating University in 1995. He was returning to Xi’an to see his family and buy some houses. He purchased 7 in the East part of the city during Spring Festival of this year and was returning to get more. Seems to me, the man is not going to live in all those houses at the same time and is purchasing them with the hopes that he can flip them later for a tidy profit. Which begs the question is this a housing market or a speculation market? Even my wife was caught up in the get rich quick mentality. She thought that a worst case scenario would be that we could rent the new house. My question was “To who?” If everyone we know is buying houses like it’s going out of style, then who are we renting to? I’m still awaiting an answer.  

Prices

When we started looking at we were looking at several locations ranging from 5000-8000RMB per square metre and then, the loan restrictions hit. The government wisely saw that things were getting a bit out of hand and they restricted bank loans to people with 2 or more homes per family. I thought this would level prices out or, if we were lucky, maybe drop them a bit. Oddly enough, the exact opposite happened. Based on my rough estimates, the prices jumped by 5-7% every week!

My wife panicked, she wanted to snatch up a house now before they were all gone. I panicked in the other direction and wanted to run as far away from the housing market as my nicotine soaked lungs would take me. This is my reasoning: Using basic numbers let’s begin. 5000RMB per square metre for a 100 square metre home, that’s 500,000RMB. The average annual income of someone living in Xi’an, depending on where you get your numbers, is around 35,000RMB.

Let’s argue that a married couple gets a loan and they budget 40% of their annual net income (traditionally it is estimated that Chinese save 40% of their income) to payback the loan leaving them with 60% of two salaries. 70,000RMB x .6 = 42,000RMB, which is 3,500RMB for utilities and all other living expenses per month. Thank god health care is free and school tuitions aren’t rising dramatically…….oh wait, it’s not and they are. Hope nothing happens to that couple and forget a kid, new estimates put raising a child through University in China at 200,000RMB -1.6 Million RMB (the article elaborates on the discrepancy).

The common argument is that the family will help buy the house for them. Great, for the short-term but who then is going to pay for the aging parent’s hospital bills? If the whole family dumped all their money into the house and now are living on two salaries and pensions. They now need to take care of food, clothes, utilities, tuitions, and healthcare for a family of 7 people (2 sets of elderly parents, 1 kid, and the couple), that doesn’t leave much to spare. Living that close to the edge seems to be how America got itself into the mess that it did.

One case of cancer (which is on the rise in China) can bankrupt the family and they are forced to de-fault on their loan and will lose the house to the bank. Maybe I am missing something but it doesn’t seem possible for the average Xi’an family to afford even the most modestly priced apartment in the long-term. Not to mention the fact that the family will now need a car, and as anyone who has ever owned a car knows, they are notorious for draining all your financial resources.

Stress Tests

It was recently reported that the banks in China conducted stress tests of their banks if the housing market was to fall by 30%. Apparently, everything went well and the Stock market rose based on the success of these tests. They then recently did them for a 50-60% drop. What’s the need to all of a sudden double that percentage? Hopefully, they are just doing due diligence and this is nothing to worry about. But, I refer you again to my problems with pricing as I highlighted above. It’s mostly average people buying houses now. They can only pay for it if nothing goes wrong; at even a 30% drop in value they will be devastated.

What does all this mean? Am I paranoid and completely ignorant? Probably, and I’ll be the first to admit that I understand this housing market about as well as I understand Quantum Mechanics. But, I remember this happening a few times before in recent history. Toronto had the condo bubble in 1989, Japan started the Asian Financial crisis with a housing bubble in 1990, and of course there is the current Global Financial Crisis started by sub-prime mortgages in the U.S.A in 2007. Looks like the same thing is happening again here in China, yet people argue this is a different situation. But to me, it just seems that people are either speculating or over extending themselves to buy a home.

I understand that in China and most parts of the world a home means stability and is the center of the family structure. In China, more than most places, a home is the end-goal, without it you have nothing. But, at those prices, that are still rising, buying a home may mean losing everything in the end anyway. Guess we’ll just have to wait and see. And on a final note: I never even mentioned the 50-75 year leases. So, technically, you are just leasing the home, you don’t actually own it.

Our valuable Editor Daemon Borek has been with us since Saturday, 24 July 2010.

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Comments  

 
0 #3 Nok Wang 2010-09-19 09:02
I bought a house in china too. Honestly because of my beloved chinese wife. but i don't feel it was a good decision to make. feel quite unsafe about the ever changing situation and regulations here. i would rather buy an apartment in europe or so..well..
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+2 #2 Fred 2010-08-13 21:40
Excellent article. Nice to see a look a realistic, and personal, look at the housing market that is readable and can be understood by simpletons like myself.
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+2 #1 TheHumanaught 2010-08-12 20:52
Thanks for sharing this Daemon, great food for thought -- especially as I've been eying buying a place for a few months now. Like yourself, I just can't see the benefit to it at the moment. Unless you're way outside the booming development areas (and few people want to buy there), it seems the costs are far above the value of a place.

As an example, a friend of mine recently bought an apartment in Suzhou for around $1.2 million RMB -- granted, it's a nice place, but I compare that to being able to buy a moderately sized home (with a backyard, stairs and "real" ownership) in a small to medium sized city in Canada, and I can't see the value in buying Chinese.

But then, of course, not every Chinese has the option to choose between China and Place X.

The thing is, that whereas buying a house in China seems to be pushing the line of equality with prices back home -- renting is still much much cheaper.
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