Nov 29, 2012
Within the next 18 months you will hear a painful economic explosion emanating from China. The Chinese real estate market will overheat, explode like a super nova and result in untold political and economic “reforms”.
How do I know this will happen? There are three very clear signals:
1) Over-Building
2) Over-Speculation
3) Blind Obedience to Easy Money
Furthermore, since no-one has been through a market collapse before, there is a lack of recognition in Chinese society that these signals point to an impending collapse.
Over-Building
Without equal, for the last 15 years the main wealth creator in China has been real estate. The nouveau-riche of China (in fact all the rich are nouveau) have all made their money from real estate. Obtaining a license to control or build on a piece of land has been akin to being handed a money-printing press.
Builders have been on a construction spree as subsidies from local governments and loans from government-owned banks were thrown around like rice at a wedding,
Last year a study conducted by the NCCREA discovered what we have termed ‘The 5% Rule’. We believe there is an undisclosed policy to promote annual new construction to approximately 5% of the current or projected population. This amounts to tens of millions of new units in 2011 alone. Yet, 2011 is not an aberration but a continuation of the curve of the last 10-15 years. Recently traveling to Taiyuan, Shanxi I counted no less than 60 high-rise construction cranes peppering the skyline. This panorama and the 5% rule are repeated in virtually every city in China regardless of tier status.
Over-Speculation
As China is and shall be for the foreseeable future a source of low-wage manufacturing there is no practical way of absorbing such a massive, growing and expensive inventory or property.
Only a fraction of the population can actually afford their own unit. Most of the high levels of absorption took place 10-15 years ago as a result of pent-up demand by some individuals. But during the last 5 – 8 years, that curve has become a reverse hockey stick.
Today many units sit empty with the only activity being workers performing constant maintenance and repair on these monolith echo chambers. The only thing keeping units moving are speculators. The units are sold, but no one lives in them. It is not uncommon for these ghost units to sometimes sell 2 and 3 times over.
I have visited at least 50 massive apartment plazas with a minimum size of 10,000 units throughout China. I observe the empty streets, the deserted common areas and ask the developers and their agents how many units are sold. Almost without exception the reply is, “all of them.”
Speculation has its merits but over-speculation on this scale is trouble. In Beijing alone, apartment prices have tripled in the last 4 years.
Blind Obedience to Easy Money
I recently had a friend ask me to take a look at a business plan he had been pitching to Chinese investors. He wanted my thoughts on his business, the model and the logic in order to get my take on if there was something inherently wrong with his plan. He couldn’t figure out why he wasn’t getting any traction.
I took a look. It was a great plan based on a great idea in a great niche. It hit all the right buttons: untapped growing market, no sign of slowing, everybody needing it, and if given a running start there was a chance to own an industry in the fastest growing economy on the planet.
But no one is interested. Everyone he pitches to wants to concentrate on real estate . . . . building more units. Even the guys who are not even in the real estate business want to get into the business and have zero interest in any other industry or investments . . . other than building more units. Making money in real estate seems just too easy. If you can get the license, the money just seems to fall into your lap. I have heard this story literally hundreds of times.
No experience to recognize the signs
A market collapse is all but a certainty. No-one believes it will come though because there is no experience to recognize the signals of a collapse.
No developer on the mainland has more than 15 years of experience. As recent as 1994, other than the 10-lane Chang’An Boulevard, Beijing was still a series of dirt roads lined with single storey brink shanties.
Modern Beijing only began construction in earnest during the last 10 years with the bulk of it in the last 4 to coincide with the 2008 Beijing Olympics. Professional property development is a new industry here, with any experience in the early years being imported from Hong Kong.
The original Hong Kong developers are now far outnumbered by mainlanders who lack experience and foresight. Many of the projects currently under development are being managed by rookies. I recently met with a pretty rough and tumble guy who now calls himself “developer.” Six months prior he was a cab driver. However, through intense guanxi and other significant white-envelope promises he was able to secure a license to build a large tract of residential units. In the last 6 months I have met at least 2 dozen such “developers” each with a similar story (shop-keeper, bus driver, farmer). And these guys are getting in for one reason: Easy Money.
I am sensitive to the notion of self-fulfilling economic prophecies and the effect of nay-sayers on good times; The economic party-poopers, if you will. I understand that if enough people express enough pessimism eventually the marketplace follows. But the evidence seems pretty clear. Rampant over-building (which should depress prices) has given way to skyrocketing prices throughout the country due only to pyramid scheme-like speculators. And the entire process shows no sign of slowing because of the seemingly easy money to be had. But this mix is economically toxic. With the eventual explosion in the next 18 months, what will be the result? How will it affect the political climate? How will it affect economic growth and Beijing’s policies of wage growth? What affect will it have on personal wealth building in China? What happens to the currency and the mounting local debt? The fact is that nobody knows. It’s impossible to discern the result of an event that has never happened before. But is safe to assume that when the pyramid collapses it will be pretty ugly.
But like any collapse, restructuring or realignment, there is always tremendous opportunity if you are prepared.
Source：asianbusinessdaily.com