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Property Prices Are Still Falling Faster Than They Have In Most People’s Lifetimes

A report from ABC News in Australia. “Many people who bought properties in Sydney or Melbourne a year ago on 10 per cent deposits are facing the fact that their life savings have, for the moment at least, disappeared in falling home values, while crashing markets have devastated investors in regional towns where booms have turned to busts.”

“Melbourne man David was in high spirits seven years ago when he invested in two properties in the thriving regional Queensland city of Gladstone, when the pubs were full and ‘everybody was loaded with cash.’ His father and uncle also bought a couple of investment properties each. ‘They kind of got all excited about it and we all fed off each other’s excitement,’ he told PM.”

“Then Gladstone’s boom ended when energy companies finished building several giant LNG export terminals, and most of the workers employed in the construction phase left town. David’s investment homes are now worth half the price he paid for them, the rent on them does not cover his bank loans, and nobody wants to buy them off him.”

“The investment properties were getting rents over $1,000 per house during the boom, but now they would be lucky to get a few hundred. He was forced to sell off the rest of his property portfolio and move into a share house as a result of the Gladstone crash.”

“Chris Bryck, founder of financial services company Stockspot, said his clients are increasingly investing their money in shares and cash. ‘It’s a snowball effect — when people see prices fall in a market, they’re less inclined to buy,’ he told RN Breakfast. ‘People fear falling prices, and they move out of the way.'”

“At the moment, he said, property prices are still falling faster than they have in most people’s lifetimes, especially in the two biggest cities.”

The Nikkei Asian Review. “China’s once-sizzling property market is showing signs of a slump, adding to a growing list of warning signs about the Chinese economy. Sales volumes in 24 cities tracked by China Real Estate Index System fell by 44% in the first week of 2019 compared with a year earlier.”

“Many analysts now expect China’s home sales to contract this year. Perhaps more worrisome, though, is the growing number of Chinese property companies that appear to be struggling under the weight of heavy debt burdens. Moody’s Investors Service has assigned junk status to 51 of the 61 Chinese property companies it assesses.”

“The property slump has also triggered several episodes of social unrest, which Beijing seeks to avoid at all costs. In October, Shanghai homebuyers came out in droves to protest a developer’s decision to cut prices in an apartment complex. The angry residents screamed slogans denouncing the developer and carried placards saying: ‘Give us our hard-earned blood-and-sweat money back!'”

“Xiang Songzuo, a professor at the prestigious Renmin University in Beijing, warned in a speech in Shanghai on Jan. 20 that real estate is one of a few serious ‘gray rhinos’ — a potential risk that is obvious, but ignored — facing the economy this year. According to his estimates, about 80% of Chinese people’s wealth is in the form of real estate, totaling over $65 trillion in value — almost twice the size of all G-7 economies combined.”

“To him, Chinese people have ‘played around with leverage, debts, and finance, and eventually created a mirage in a desert that will soon entirely collapse. This collapse will be a perfect Minsky moment,’ he added, using the term for a sudden collapse in asset prices after a long period of growth, named for American economist Hyman Minsky.”

“While developers struggle to refinance their piles of debt, Chinese cities are facing a glut of unoccupied flats.
A massive building boom across China, including in tier-two cities like Jinan, has left as many as 65 million empty apartments across the country, according to estimates by Gan Li, a professor at Southwestern University of Finance and Economics in Chengdu. Prof. Gan’s striking estimate that 21.4% of housing — stand unoccupied was published in a report in December. The proportion is up from 18.4% in 2011, driven by a rise of vacancies in second- and third-tier cities.”

“Prof. Gan warns of potential financial risk from the rising number of vacant houses. Of the 22.9 trillion yuan ($3.4 trillion) of outstanding mortgage debt held by Chinese people as of the end of 2017, 47.1% of that is tied up in residences that now stand empty.”

“In other words, almost half the bank loans are tied to housing assets that are neither being lived in nor churning out rental income. According to the stress test conducted by the professor, a 5% fall in housing prices would take away 7.8% of the actual asset value of occupied houses, but 12.2% for unoccupied houses ‘If housing prices keep on falling, the damage to unoccupied residences accelerates even more than the occupied [ones],’ Prof. Gan said in the report.”

From Global News in Canada. “One unintended consequence of the oversupply in multi-family homes over the past few years, said Jason Yochim, CEO of Saskatoon Region Association of Realtors , was the ‘magnified downward pressure on market values.'”

“‘The pricing for multi-family, especially apartment-style units, has been hit much harder than other housing types,’ he said. ‘Owners who have put the minimum down payment on these properties are at the highest risk of owing more than their home is worth.’ He said it is resulting in many condo owners being left ‘under water’ with their mortgages if they purchased when demand was higher, resulting in higher foreclosure numbers.”

This Post Has 54 Comments
  1. ‘Of the 22.9 trillion yuan ($3.4 trillion) of outstanding mortgage debt held by Chinese people as of the end of 2017, 47.1% of that is tied up in residences that now stand empty’

    Still no bubble MSM?

    ‘Owners who have put the minimum down payment on these properties are at the highest risk of owing more than their home is worth.’ He said it is resulting in many condo owners being left ‘under water’ with their mortgages if they purchased when demand was higher, resulting in higher foreclosure numbers’

    Notice, no subprime. No fraud. Just shacks and airboxes underwater and off they go. Kinda like the 200k drop in Santa Barbara. Wa happened!

    https://globalnews.ca/video/4877955/shocking-house-foreclosure-numbers-in-saskatoon

        1. real estate, totaling over $65 trillion in value — almost twice the size of all G-7 economies combined

          Sorry Adan, we told you so for a few years.

    1. the questions

      1. what happens to the people in the construction, real-estate, appliance industries, mortgage banking – a bunch – 20% (?) lose their jobs

      2. what happens to city govt (other that Beijing and Shanghai)? A lot of their revenue came from sell land

      I think that un rest wil be a severe problem. This is why the chinese princelings (a real term refering to children of the comunist part and the assocated govt own companies) laudered money out of China. They knew

      1. “1. what happens to the people in the construction, real-estate, appliance industries, mortgage banking – a bunch – 20% (?) lose their jobs”

        No mo’ pink.

    2. Why do Chinese people want to own empty housing units in Canada? Aren’t there enough empty units in Chinese ghost cities to go around?

  2. “Many people who bought properties in Sydney or Melbourne a year ago on 10 per cent deposits are facing the fact that their life savings have, for the moment at least, disappeared in falling home values, while crashing markets have devastated investors in regional towns where booms have turned to busts.”

    It would take a heart of stone to read about the travails of these speculators, and not laugh.

  3. ‘Xiang Songzuo, a professor at the prestigious Renmin University in Beijing, warned in a speech in Shanghai on Jan. 20 that real estate is one of a few serious ‘gray rhinos’ — a potential risk that is obvious, but ignored — facing the economy this year. According to his estimates, about 80% of Chinese people’s wealth is in the form of real estate, totaling over $65 trillion in value — almost twice the size of all G-7 economies combined.’

    ‘To him, Chinese people have ‘played around with leverage, debts, and finance, and eventually created a mirage in a desert that will soon entirely collapse. This collapse will be a perfect Minsky moment,’ he added’

    The US press has completely ignored this guys speech, which probably put him in personal danger. I’m so surprised…

    1. “According to his estimates, about 80% of Chinese people’s wealth is in the form of real estate, totaling over $65 trillion in value — almost twice the size of all G-7 economies combined.”

      And this wealth is a function of price.

      Eighty percent of Chinese people’s wealth is created by prices. Think about that. If/when prices decline then eighty percent of the people in China will suffer a hit to their wealth, as in pooooof.

      1. (snip)

        “Prof. Gan warns of potential financial risk from the rising number of vacant houses.”

        Oh? And why is that?

        “Of the 22.9 trillion yuan ($3.4 trillion) of outstanding mortgage debt held by Chinese people as of the end of 2017 …”

        Yes, yes. Go on …

        “… 47.1% of that is tied up in residences …”

        Yes?

        “… that now stand empty.”

        😮

        1. It’s so shocking! So, they are in debt for these units, paying a mortgage on them, but neither living in them NOR renting them out?! It’s hard to conceptualize this collecting behavior. These aren’t beanie babies or tulips….are they actively for resale, ALL of them?!

          1. The holding cost of a shack in China is lower than in the USA. Two main reasons why:

            1) There is no annual property tax, just an initial tax at the point of sale. Of course, you have a “lease” on the property for so many years — most residential apartments are 70 years. After the lease ends, you will need to pay some tax, but it’s not defined yet what that will cost. Property tax is local, so each province and city and district will likely have its own policies. Such is China!

            2) Renting an apartment out means it is “used”, or “second hand”. So it brings down the perceived value of the apartment. Thus, for a true speculator, it is preferable to keep a unit empty.

          2. Interesting to learn about the differences in China property sales and ownership. I wonder if mortgages work differently too… are these properties sitting there empty with decades long notes on them with mostly interest paid the first 1/3 of the term and 20% down like America does it? I just still have a hard time wrapping my head around high leverage for betting on an asset that sits empty and requires *any* monthly payment even if lower without taxes added

          3. “The holding cost of a shack in China is lower than in the USA. Two main reasons why:”

            What about capital losses in a collapsing bubble, or physical depreciation when rats or other pests occupy an empty dwelling. Aren’t those hodling costs, too?

          4. @Professor Bear:

            Great points about structural depreciation of an empty shack. I agree. But let me try and explain the mentality of a China Shack Speculator:

            Private property is a new concept in modern China. It wasn’t until the 1990s or so that people could even “own” property. In the past two decades prices have appreciated at a rate consistent with and sometimes exceeding aggregate GDP growth. There have been no real busts, so it’s been a one-way bet with guaranteed profit (on paper). Also, China has lots of people, and due to this many believe that unlimited housing needs can be absorbed by the market profitably.

            It’s an insane perspective, but manias have a tendency to bring out the dumbest in people.

          5. Private property is a new concept in modern China.

            You can own a house, but you can only rent the land for 70 years.

  4. Ben Jones’ joke blog …

    “Then Gladstone’s boom ended when energy companies finished building several giant LNG export terminals, and most of the workers employed in the construction phase left town.”

    This building of giant LNG export terminals certainly seem to resemble a … a … PROJECT – you know, one of those task thingys that has a BEGINNING and also has an END. Something that should not be a surprise to anyone who has any sense.

    As a consequence to the FORECASTED END of this project we end up with this …

    “David’s investment homes are now worth half the price he paid for them, the rent on them does not cover his bank loans, and nobody wants to buy them off him.”

    Another nation of dummies.

    1. Then Gladstone’s boom ended when energy companies finished building several giant LNG export terminals, and most of the workers employed in the construction phase left town

      I was going to make a comment similar to Prof Bear’s. How did these guys not see that their boom would only last until the construction projects ended?!

      1. because they were naive – and real-estate and financial folks tricked them.

        And some folks were desperate working middle class lives without sufficient savings to retire. They thought this was a way – and nobody thought to ask them whether they were really sure

      2. I suspect that most people buying in a mania are mimicking the behavior that made their friends rich. It has nothing to do with understanding the durability of the boom.

  5. “In other words, almost half the bank loans are tied to housing assets that are neither being lived in nor churning out rental income.”

    I’m still gobsmacked that they weren’t even renting them out —- here in the Bay Area, any Chinese landlords I’ve seen renting out an income property have asked for the very top end of the rates and pushed hard to re-fill any vacancies immediately. What were they thinking?

      1. wow – i suggest that poeple watch this – skip ahead on the slow portions of the documentary.

        It was a scam (and a gigantic show) by the power brokers. Normal people (like here and in Europe) got caught up in the side effects.

    1. i am in a Toronto suburb last week and this week – but travelling by train to downtown banking district every workday.

      They are still confused that there is a lull (or cliff) in housing.

      The thing that amazes me is how well the bankers (not just the execs but regular workers – who might not be making more than $80K CAD) are dressed. Like the Chinese documentary above, i wonder if they are unkowning in a sham.

  6. Given how the stock market has been going up like gangbusters every day, is it safe to assume that the recent recession fears have blown over without incident?

      1. I recall feeling like the holiday period 2018 was really not good at all, but the Medis kept telling me it was gangbusters. I just didn’t feel it, didn’t see people at shops, at the big boxes (which were dead as door nails when they should have been moving moving all the stuff we all needed to get for Xmas!!!), even felt like the internets were quiet somehow. People just seemed in shed mode rather than acquire mode. But the media told me retail was best ever so Wall Street must be both shocked and not too worried that mere consumers matter in this economy!

    1. Markets
      Sub-Zero Bund Yields Are Back on Radar as Europe Fears Recession
      By John Ainger
      February 12, 2019, 9:00 PM PST
      Updated on February 13, 2019, 3:23 AM PST
      – German bund yields approach zero as recession fears grow
      – Ten-year yields were last in negative territory in 2016

      Yields on benchmark German government bonds are within touching distance of zero percent for the first time in almost three years as Europe’s economic performance stalls and concerns over global trade spur investors toward havens.

      A no-deal Brexit, upheaval in Italian politics or a deteriorating labor market are among the risks that could turn bund yields negative, according to strategists.

    2. US Treasury yields fall after weakest retail sales data since 2009
      Fred Imbert | Silvia Amaro
      Published 7 Hours Ago Updated 1 Hour Ago CNBC.com

      U.S. government debt prices rose on Thursday as investors sought safety following disappointing retail sales data.

      The 10-year Treasury note yield fell to 2.64 percent, while the 2-year rate dropped to 2.489 percent. Bond yields move inversely to prices.

      Retail sales fell 1.2 percent in December, marking their biggest monthly drop since September 2009, according to The Commerce Department. The department also said retail sales fell 0.9 percent in December when excluding gasoline station sales.

    3. Who knew that insanely high housing costs would crowd out available monies for American consumer spending on everything else?!

    4. Cars are driving us into recession
      Jim Edwards
      41m
      car jump Photo by Christian Petersen/Getty Images
      Analysis banner
      Recession Watch Banner
      – 7 million Americans have gone into “serious delinquency” on their car loans.
      – The automobile industry in both the US and Europe — for different reasons — has started to look like a symptom of the underlying drags on Western economies.
      – In Europe, many people have simply stopped buying cars.

      LONDON — More than 7 million Americans have gone into “serious delinquency” on their car loans, according to the Federal Reserve Bank of New York, and that is one of the reasons the US Fed has become more cautious about raising interest rates.

      In fact, the automobile industry in both the US and Europe — for different reasons — has started to look like a symptom of serious drags on the underlying Western economies. Europe is flirting with recession — and many people here have simply stopped buying cars. In America, danger signals from auto-loan debt suggest that US consumers don’t feel like they’re enjoying the best of times.

      Both factors suggest many consumers feel their finances are no longer robust enough to handle big-ticket purchases.

    1. “Says student loan debt to blame.”

      Low incomes and poor employment prospects for the younger generation have nothing to do with it.

  7. “One unintended consequence of the oversupply in multi-family homes over the past few years, said Jason Yochim, CEO of Saskatoon Region Association of Realtors , was the ‘magnified downward pressure on market values”

    Isn’t this Econ 101? Supply goes up, price goes down. How is it an unintended consequence?

    1. “Isn’t this Econ 101? Supply goes up, price goes down. How is it an unintended consequence?”

      In the case of real estate supply is not defined as the number of housing units in existence, instead supply is defined by the number of housing units that are for sale.

      The physical supply of housing units takes a long time to alter but not so the number of housing units put up for sale. But for marketing purposes it is the number of physical housing units that are touted.

      You use what works.

      1. FOMO can morph into FONGO in a very short period of time, which means a so-called housing shortage can morph into an abundant supply of houses in a short period of time, which means the driving forces behind this nonsense is, at root, psychological, which once again demonstrates that the majority of people, at root, are really quite stupid.

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