An Over-Exuberant Market Normally Ends In Tears

A report from Cuffelinks on Australia. “The extent of the price correction was described by Greg Paramor, former Managing Director of the listed property group, Folkestone (recently acquired by Charter Hall). He is a past President of the Property Council of Australia. In a private talk to clients last week, he summarised current apartment market conditions.”

“‘When you get an over-exuberant market, it normally ends in tears, and we’re seeing some tears at the present time, particularly in the apartment market in Sydney, Melbourne and parts of Brisbane. Owner-occupiers in the right locations are still going well from people downsizing.'”

“‘But the people at the coal face who are doing the project marketing to investors say about two months ago, the market just stopped. They say if they dropped the price 20%, nothing would change. There are no buyers out there. We’ve seen this with the banking system going through its changes and the pull back from international demand, particularly mainland China. We are seeing a real problem develop in the investor end of apartments. The credit squeeze has stopped people in their tracks and anyone with money is sitting back and waiting.'”

From Bloomberg on China. “More signs have emerged that China’s housing market is cooling, with sales in the secondary market, land purchases by developers and contracted sales at the biggest builders all falling last month.”

“Sales of existing homes, which are quarantined from the government curbs on the new home market, last month plunged to a four-year low in 10 major cities tracked by China Real Estate Information Corp. Lackluster sales will likely weigh on existing-home prices in coming months, Shanghai-based analyst Wang Zhaojin said. In September, new-home price growth slowed for the first time in seven months.”

“Cash-strapped developers are also pulling back. Land sales in 40 cities tracked by CRIC fell 0.5 percent in the first 10 months from the same period a year ago, a sharp contrast to the previous two years when land sales surged about 40 percent. With builders facing a record $18 billion of bond maturities in the first quarter of 2019, the cooling in the land market is set to intensify.”

“And it’s no wonder developers are turning cautious. Contracted sales at the 100 biggest builders declined 11 percent in October from September, CRIC data showed, even as some offered incentives ranging from free luxury cars and hefty discounts during a week-long national holiday.”

The Nikkei Asian Review on China. “Kelly Chai, a white-collar worker at a technology company in Beijing, hasn’t spent any money on luxuries for a while. Once upon a time, Chai used to buy lower-end Louis Vuitton products, but she now refrains from spending even $400 on a Coach handbag. ‘I could not make up my mind. I feel it’s not necessary,’ said the mother of a 7-year-old, adding that her money is better spent elsewhere.”

“For years, companies selling luxury goods have counted on China for growth. They relied on Chinese consumers for a third of their global sales. But the momentum appears to be slowing as some in the middle class cut back to cope with swelling bills and shrinking wealth.”

“For Chai, $2,300 of the monthly family income is spent paying down a mortgage for an apartment near a good primary school so that her son can attend it. Fees for his school, private tutoring and extracurricular activities cost another fortune.”

“Analysts said that the purchasing power of China’s middle class over the years has been backed by investment gains on paper and easy credit, as opposed to genuine income growth.”

“‘The stock market is bad right now and the property market is frozen,’ said Liao Qun, chief economist at China Citic Bank International. ‘It has become harder for people to cash out.'”

“Andy Xie, an independent economist in Shanghai, pointed to the boom and bust of peer-to-peer lending platforms that matched lenders and borrowers online, allowing borrowers to get credit on much looser standards than banks. The proliferation of the P2P platforms offered an easy way for consumers to buy high-end goods. Between the end of 2015 and October 2017, China’s short-term consumer loans rose almost 60% to 6.6 trillion yuan, according to a Tsinghua University report.”

“‘The bubbles will burst,’ he said.”

“Beijing has also tried to encourage spending at home by cracking down on overseas expenditure. Tighter border checks on undeclared luxury goods have been in place since October, according to industry insiders. Ostensibly, this measure is to rein in daigou — a practice of buying tax-free goods overseas and reselling them domestically at a profit, said Mariana Kou, a Hong Kong-based analyst at investment group CLSA. But it will also have an impact on big-spending travelers.”

“In 2017, mainland Chinese spent over $115 billion during more than 130 million overseas trips. About 75% of luxury consumption by Chinese nationals occurred outside the country, according to estimates by management consultancy Bain & Company.”

“‘It’s difficult to bring two LV bags to China now,’ Kou said.”

The South China Morning Post. “It’s not just developers that are having trouble selling flats in Hong Kong. Now auctioneers are struggling to get high enough bids to clear out foreclosed homes. A year ago, property prices were soaring, and auctioneers routinely saw new or used homes that had been repossessed by banks receive multiple bids before the hammer fell.”

“But not now. At an auction Tuesday, only two out of nine foreclosed homes offered were sold, despite a high turnout of 65 prospective buyers. While the two that sold saw a run-up in bids, five couldn’t get the asking price and two drew no bids at all.”

“‘Buyers expect (flat) prices to drop further,’ said Tsang Kit-chun, an auctioneer of AA Property Auctioneers. ‘Why would they offer high prices when they thought they could buy more cheaply later?'”

“Similar stories are being reported by other auctioneers. They are the latest flashing sign that Hong Kong is turning into a buyer’s market. And buyers are starting to say that purchasers of new flats in recent time have paid too much.”

“At an auction in mid-September, a large luxury flat at the 1&2 Ede Road development in Kowloon Tong went up for bids. It had been bought for HK$55.8 million two years ago. The owner, who had paid off about half of the house, couldn’t keep up with the mortgage payments. The bank repossessed the flat, and put it up for auction.”

“But the top bid was HK$53.5 million – less than the original purchase price. The bank – Bank of Communications – pulled the flat out of the auction. ‘Not long ago, the unit at Kowloon Tong would have gone very fast,’ said Henry Choi, director at Century 21 Surveyor.”