Telegraph's Evans-Pritchard: Standard Chartered Warns of 30% Drop in Chinese Property Prices

Following up on my previous post on China's bubbly high-end real estate market, here's permanently gloomy Ambrose Evans-Pritchard of Telegraph UK, telling us that the Chinese real estate property prices in major cities are set to plunge 30%.

China's property market braced for 30pc drop
(Ambrose Evans-Pritchard, 7/6/2010 Telegraph UK)

"Standard Chartered has told clients to prepare for a fall in property prices of up to 30pc in Beijing, Shanghai, Shenzen, and other large cities in China as the delayed effects of monetary tightening begin to bite.

"Stephen Green, the bank's China economist, said a glut of newly built homes were hitting the market just as buyers are restrained by higher down-payments and curbs on speculation. "We believe developers will be forced to cut prices," he said.

"Kenneth Rogoff, ex-chief economist for the IMF, told Bloomberg Television in Hong Kong that the denouement could prove abrupt after such a torrid boom. "You're starting to see that collapse in property and it's going to hit the banking system," he said.

"The government is trying to deflate the housing market gently, mostly using tools known as "financial repression" rather than Western style rate rises. Xu Shaoshi, land minister, said sales are already dropping. "In another quarter's time or so, the property market will probably come to a full correction and prices will fall. It's hard to say to what extent they will fall," he said." [The article continues.]

I've never seen a successful soft-landing from a sugar-high bubble, resulted from highly inflated money supply.

It is also good to recall at this time my post in early January about the "Merchants of Wenzhou" selling out their investment properties in Beijing. I think these shrewed investors knew when to bail with fat profits.

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China's Real Estate: Bubble? What Bubble?

A real estate agent in Shanghai selling luxury high-rise apartments is puzzled at the question by the BBC Business Daily's interviewer: "Is this a bubble?"

"Bubble? People are more cautious these days, but no, it's not a bubble. 80% of the buyers are the "end users" (not speculators). A 320 square meter apartment sells for US$4.5 million. We have USD$30,000 bathtub in the master bedroom. This is what the discerning buyers (top 5% of population) expect nowadays..." (I'm paraphrasing.)

The average wage of urban workers in China was about $5000 per year in 2007. The wage gap between the workers, though, have grown rapidly in recent years. Within the same company, the gap can be between 10 to 100 times (and that's from an article in 2007!) - an average worker of the company may be getting $5000 a year, but a middle manager may be getting $125,000 a year.

There are 477,000 millionaires in China (that's the world's 4th after the US, Japan, and Germany), politically still a Communist country.

You can listen to the entire program here. (Total 18 minutes. Shanghai real estate is after 7 minutes into the program.)

The last segment of the report is about London real estate. London's high-end real estate (over US$3 million) is booming again because of foreign investors (Russians, Indians, and Greeks, whose investment doubled in recent weeks) looking for a place to park their money in relative safety. (Besides, British Pound got cheaper.)

At the height of the real estate bubble in Japan, office ladies were eating tiny pieces of cake with pure gold flakes on top with their afternoon tea. $30,000 bathtub seems very close to being a signal of the real estate market top in China.

If a real estate professional in Shanghai is confident he can sell a $4.5 million apartment, good for him, but it is a bubble; the question is how much bigger can it still get before the inevitable collapse, and how long will it take?

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Trump: Best Real Estate Investimg Market Ever Is Now

I saw this banner ad on a Yahoo Finance page yesterday. Donald Trump is offering a free seminar on how to invest in real estate. If you go to the site, you are greeted with a video that proclaims "This is the best real estate investing market in the history of our country!"


You would think real estate properties are the last thing that any sane person wants to invest, given what has transpired since 2007.

Anecdotal evidence in the local residential real estate market shows there are buyers, a great many of them, buying across the board - from trailer homes to multi-million-dollar beach properties. Real estate professionals in the area say many of these investors are cash buyers, including foreign buyers, buying up short sales and foreclosures. Higher-end properties that are not short sales or foreclosures have started to move. The inventory level is actually back to where it was at the peak of the housing bubble: mere 4.6 months.

Is it possible that the real estate market is clearing, at least the residential market? Or is it just the banks are withholding the inventory and the worst is yet to come?

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Blackrock and Tishman Walk Away from Manhattan Apartment Project

Morgan Stanley has done it. Now Blackrock is doing.

The joint venture of Blackrock Inc. and Tishman Speyer Properties has decided to return the key to the lenders and walk away from the Manhattan apartment project.

Tishman Venture Gives Up Stuyvesant Project (1/25/2010 Wall Street Journal)

"A group led by Tishman Speyer Properties has decided to give up the sprawling Peter Cooper Village and Stuyvesant Town apartment complex in Manhattan to its creditors in the collapse of one of the most high-profile deals of the real-estate boom.

"The decision comes after the venture between Tishman and BlackRock Inc. defaulted on the $4.4 billion debt used to help finance the deal. The venture acquired the 56-building, 11,000-unit property for $5.4 billion in 2006—the most ever paid for a single residential property in the U.S. The venture had been struggling for months to restructure the debt but capitulated facing a massive debt load and a weak New York City economy that has undercut rents and demand for high-priced apartments.

"The property's owners signaled they would be unable to reach a deal with lenders and instead decided to allow creditors to proceed with what amounts to an orderly deed-in-lieu of foreclosure, which means a borrower voluntarily gives the property back to lenders to avoid a foreclosure proceeding." [The article continues.]

The property was acquired for $5.4 billion, but is currently valued at less than $2 billion. The joint venture is underwater by $2.4 billion, as its mortgage is $3 billion (1st) and $1.4 billion (2nd), according to the AP article on the subject.

When a big financial firm and a big property management firm do it, it's called "strategic default", a wise business decision; if a distressed underwater homeowner does it, it is called "walk away", with a stigma of irresponsibility attached.

The article also mentions other investors in the project, who is set to lose almost all their investment:

"By some accounts, Stuyvesant Town is only valued at $1.8 billion now, less than half the purchase price. By that measure, all the equity investors—including the California Public Employees' Retirement System, a Florida pension fund and the Church of England—and many of the debtholders, including Government of Singapore Investment Corp., or GIC, and Hartford Financial Services Group, are in danger of seeing most, if not all, of their investments wiped out."

CALPERS again. But the Church of England??? What is the world coming to?

GIC is set to lose $575 million in the form of mezzanine loan backed by the property, on top of $200 million in equity. Ouch.

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Who, Me? Yes You, Mr. Greenspan

Peter Schiff writes in the article that appeared in Lewrockwell.com [emphasis mine]:

"... in a speech this Tuesday before the National Association of Realtors, Sir Alan “the-bubble-blower” claimed that his low interest rate policies in the early and middle years of this decade had no effect on mortgage rates or real estate prices. As a result, he claims no responsibility for the subprime mortgage crisis.

"His primary defense is that mortgage rates were a function of long-term interest rates which were simply not responding to the movement in short-term rates, which he did control. While it is true that the flow of capital from foreign creditors with excess dollars did keep long rates low despite rising short rates, this “conundrum” was not the leading factor in the housing bubble. Although rates on thirty-year fixed rate mortgages are based on long-term bonds, by 2005 such loans had become an endangered species. The housing bubble was all about adjustable-rate mortgages with 1–7 year teaser rates primarily based on the Fed funds rate.

"Greenspan expresses exasperation now, as he did then, that his careful nudging of interest rates higher by quarter-point increments did not translate into corresponding increases in long-term rates... If the “measured pace” of his quarter-point hikes were too slow to produce the desired effect, why didn’t Greenspan jack up the pressure?

"The bottom line is that Greenspan fathered the housing bubble and now he refuses to acknowledge kinship of his wayward child. His denial of responsibility is an act of stunning bravado, and is a testament to his ability to turn even the simplest of situations into an impenetrable tangle of theories and statistics. The private sector jokers who now hold top dishonors in our pack of economic villains are easily trumped by the Maestro. The fact that Greenspan still has any credibility shows just how little understanding the general public, including Wall Street and the media, actually have about this crisis."

Well said. I have nothing to add.

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