Chinese property bubble?

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Caduceus
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Chinese property bubble?

Post by Caduceus » Wed Aug 21, 2019 9:26 pm

I just returned from China and it was really fascinating to hear the locals explain the way they buy property. Here were my key takeaways and I am still amazed by it:

- Many Chinese people don't like equities/trust the stock market. They see property as something concrete, something they won't lose money on. The only "sure" investment, for them, is to own property. So you have a country with a crazy high savings rate, with little else to invest in, pouring everything into the real estate market, eschewing equities/bonds.

- But property prices, which are very high, are often out of a single person's reach, so entire families - and by that, I mean extended families - will pitch in to buy a property. Uncles and aunts and parents and second and third cousins, etc. All pooling their money to buy one property. And it gets better - these are understood as "loans" to one another in expectation of a profit. So they expect to split the profits according to their share of the property. And this represents essentially, say, 70% or more of the collective net worth of one person's extended family.

- But because they think of these assets as investment properties, they are unwilling to use/stay in the house too much themselves!!! And there are way more properties than renters, so when I visited my friend, I was amazed that he said the entire apartment complex was bought up, but more than half the units were EMPTY. That's just nuts. So Chinese citizens are buying properties that they don't use themselves for fear of devaluing/damaging the unit. And they are skeptical about renters because they don't want renters to damage the unit (or perhaps they can't find renters).

The whole thing sounds like a recipe for disaster. A country with an excess of liquid savings, with an irrationally strong preference for real estate relative to equities/bonds/international assets, regardless of valuations. Entire households - not just individuals - with a concentrated, undiversified position in one asset. And on top of that, owning houses that sit empty instead of collecting rent, in the hopes of cashing in on speculative price gains by reselling the property.

Oh, and I was told that Chinese properties are mainly leasehold for sixty years. So the depreciation curve will get very steep at some point?

How long can this go on for?

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Nate79
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Re: Chinese property bubble?

Post by Nate79 » Wed Aug 21, 2019 9:36 pm

Caduceus wrote:
Wed Aug 21, 2019 9:26 pm
I just returned from China and it was really fascinating to hear the locals explain the way they buy property. Here were my key takeaways and I am still amazed by it:

- Many Chinese people don't like equities/trust the stock market. They see property as something concrete, something they won't lose money on. The only "sure" investment, for them, is to own property. So you have a country with a crazy high savings rate, with little else to invest in, pouring everything into the real estate market, eschewing equities/bonds.

- But property prices, which are very high, are often out of a single person's reach, so entire families - and by that, I mean extended families - will pitch in to buy a property. Uncles and aunts and parents and second and third cousins, etc. All pooling their money to buy one property. And it gets better - these are understood as "loans" to one another in expectation of a profit. So they expect to split the profits according to their share of the property. And this represents essentially, say, 70% or more of the collective net worth of one person's extended family.

- But because they think of these assets as investment properties, they are unwilling to use/stay in the house too much themselves!!! And there are way more properties than renters, so when I visited my friend, I was amazed that he said the entire apartment complex was bought up, but more than half the units were EMPTY. That's just nuts. So Chinese citizens are buying properties that they don't use themselves for fear of devaluing/damaging the unit. And they are skeptical about renters because they don't want renters to damage the unit (or perhaps they can't find renters).

The whole thing sounds like a recipe for disaster. A country with an excess of liquid savings, with an irrationally strong preference for real estate relative to equities/bonds/international assets, regardless of valuations. Entire households - not just individuals - with a concentrated, undiversified position in one asset. And on top of that, owning houses that sit empty instead of collecting rent, in the hopes of cashing in on speculative price gains by reselling the property.

Oh, and I was told that Chinese properties are mainly leasehold for sixty years. So the depreciation curve will get very steep at some point?

How long can this go on for?
I heard this same story a decade ago in my first business trips to China.

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nedsaid
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Re: Chinese property bubble?

Post by nedsaid » Wed Aug 21, 2019 9:47 pm

Do an internet search for ghost cities in China. From what I have read, these "ghost cities" are not uninhabited but underpopulated. The estimate is that there are 50 such underpopulated cities in China.
A fool and his money are good for business.

Topic Author
Caduceus
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Re: Chinese property bubble?

Post by Caduceus » Wed Aug 21, 2019 9:49 pm

nedsaid wrote:
Wed Aug 21, 2019 9:47 pm
Do an internet search for ghost cities in China. From what I have read, these "ghost cities" are not uninhabited but underpopulated. The estimate is that there are 50 such underpopulated cities in China.
I think that's a little different though. The ghost cities are full of houses built by the government that haven't been bought yet. No one (well, maybe the government) will lose any money on that.

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Re: Chinese property bubble?

Post by thx1138 » Thu Aug 22, 2019 9:41 am

Here’s an article on the issue:

https://www.citylab.com/equity/2019/02/ ... es/583528/

Again this isn’t about government owned vacant housing (which is a separate issue) but privately owned vacant housing. Article mentions government owned vacants are mostly in fourth-tier cities while privately owned vacants are mostly in third and second tier cities with some in first tier cities as well.

Article states that 47% of all mortgage debt is for vacant properties.

Also discusses some of the so far mostly failed attempts by the government to reduce this kind of speculation.

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Re: Chinese property bubble?

Post by 02nz » Thu Aug 22, 2019 9:48 am

The property values are indeed rather insane in China - in Beijing and Shanghai, real estate in desirable areas is some of the most expensive anywhere in the world, out of all proportion to income or rent, which is much lower. And even in second-tier cities the price of housing is similar to or higher than U.S. cities we would consider HCOL to VHCOL. Clearly the Chinese see buying housing as a store of value rather than as one way of paying for a roof over the head. By any reasonable standard, yes there's a bubble, but the government won't let it burst quickly, as that could cause unrest.

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Re: Chinese property bubble?

Post by knowledge » Thu Aug 22, 2019 9:57 am

I feel that so much of this can be explained through cultural differences. If you grew up in a country where not even 60 years ago, the entire country was uprooted, and those that were lucky fled, you'd have a different standard of what is "rational" investing behavior. I guess you could ask - to what extent do property rights really matter if another cultural revolution occurred? I dunno, at least you could sit in your property as needed.

But intangible stores of value such as equity value and debt are items that are built upon a foundation of trust in the system - and I don't doubt that they think the folks in the US are crazy to have such faith in such contracts.

That doesn't mean that I agree with their strategy.

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Re: Chinese property bubble?

Post by sergio » Thu Aug 22, 2019 9:58 am

Earlier this year I was in China wife my wife visiting her parents in a what would be considered "lower tier" city. One morning we went to check out a new condo complex they had started building nearby. 2br 1200 sq ft condos were starting at around $120k. And this doesn't include any finishes whatsoever since a new condo in china is literally a concrete box.

This is a city where $600/month is considered a good salary! And what's even crazy is that all the units in the towers they started building were already sold out, they were pre-selling units in the condo towers that haven't even started going up yet. There must have been dozens of these complexes under construction in the area.

My MIL/FIL live in an older building by Chinese standards (built in the early 1990s), 15 years ago they almost sold their 800 sq ft condo for $10k USD. Last year the unit next to them sold for over $40k.
Oh, and I was told that Chinese properties are mainly leasehold for sixty years. So the depreciation curve will get very steep at some point?
This is true (I believe it's 70 years), but practically irrelevant since no building will stand for 70 years.

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Re: Chinese property bubble?

Post by TomCat96 » Thu Aug 22, 2019 11:15 am

Caduceus wrote:
Wed Aug 21, 2019 9:26 pm
I just returned from China and it was really fascinating to hear the locals explain the way they buy property. Here were my key takeaways and I am still amazed by it:

- Many Chinese people don't like equities/trust the stock market. They see property as something concrete, something they won't lose money on. The only "sure" investment, for them, is to own property. So you have a country with a crazy high savings rate, with little else to invest in, pouring everything into the real estate market, eschewing equities/bonds.

- But property prices, which are very high, are often out of a single person's reach, so entire families - and by that, I mean extended families - will pitch in to buy a property. Uncles and aunts and parents and second and third cousins, etc. All pooling their money to buy one property. And it gets better - these are understood as "loans" to one another in expectation of a profit. So they expect to split the profits according to their share of the property. And this represents essentially, say, 70% or more of the collective net worth of one person's extended family.

- But because they think of these assets as investment properties, they are unwilling to use/stay in the house too much themselves!!! And there are way more properties than renters, so when I visited my friend, I was amazed that he said the entire apartment complex was bought up, but more than half the units were EMPTY. That's just nuts. So Chinese citizens are buying properties that they don't use themselves for fear of devaluing/damaging the unit. And they are skeptical about renters because they don't want renters to damage the unit (or perhaps they can't find renters).

The whole thing sounds like a recipe for disaster. A country with an excess of liquid savings, with an irrationally strong preference for real estate relative to equities/bonds/international assets, regardless of valuations. Entire households - not just individuals - with a concentrated, undiversified position in one asset. And on top of that, owning houses that sit empty instead of collecting rent, in the hopes of cashing in on speculative price gains by reselling the property.

Oh, and I was told that Chinese properties are mainly leasehold for sixty years. So the depreciation curve will get very steep at some point?

How long can this go on for?

Finally someone gets it. Yes, it is absolutely a recipe for disaster. To make matters worse, another reason why extended families will unite together to purchase property is that owning property is somewhat considered a right of passage for man to be sufficiently eligible to wed.

Take a look at this:

Due in part to the one-child policy, there were 120 Chinese men for every 100 Chinese women as of 2005—in some provinces this ratio is as high as 130 to 100. If we assume everyone desires a traditional male-female long-term relationship, this means that there are some 30 million Chinese men who might be unable to find a suitable partner. With the sex ratio imbalance in favour of women, mothers-in-law—who play a key role arranging marriages—have become choosy. Everything else being equal, richer families with marriageable sons should be more appealing to the mothers of potential brides. One of the most visible symbols of this status competition comes through housing. Compared with consumer goods like cars, suits, and watches, houses are large, fixed in location, and their price is easily verified. A survey of Chinese mothers with young daughters by Shanghai Daily in March 2010 showed that 80% would object to their daughters marrying a non-homeowner. This places a lot of pressure on Chinese families with sons to demonstrate their value through homeownership. Since the turn of the century, increasing competition in the marriage market—triggered by a rise in the ratio of men to women in the pre-marital age cohort—can thus be a fundamental source of the increases in housing value.

https://voxdev.org/topic/macroeconomics ... ge-markets

also see
https://www.scmp.com/news/china/society ... oars-china


As for the 70 year lease, yes that is another disaster waiting to happen. Apparently you own the building but not the land.

Upon thinking that one day the home her entire family had poured out all their money for may not be hers, Chen Zhuo’s heart was filled with worry. “In 70 years, is my home still my own? Or to put another way, what do I have to do for it to continue being mine?”

https://www.chinasmack.com/chinese-land ... r-70-years

People who focus on the fact that "well I won't be around in 70 years" have their mind in the wrong place. That's not how it works. You don't get a house worth 500K one year, and zero the next. In year 69 of ownership, the value of the property might be equivalent to a remaining one year lease on such property. In year 68, you have a two year lease.

Suppose a family sells in year 40. Ok fine, there are 30 years left on the lease. Now they sell to a buyer...who takes out a 30 year mortgage only to own nothing at the end? No. It is clear that at year 40, the property must be depreciated significantly to account for the fact that the property will not be owned by the time the new owner is finished paying for it.

This means that property is a depreciating asset, if not sooner then later.


You have an entire generation of Chinese people who have poured their family wealth into something destined to be worth zero.

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Re: Chinese property bubble?

Post by retire2022 » Thu Aug 22, 2019 11:29 am

Op my great grandfather built the family estate and had a store.

Both lost because of the Japanese, first store all goods were eaten.

Uncle was deeded the house but moved to Guandong because jobs in urban center.

Because he was deemed landowner aka bourgeoisie he was sent to reeducation camp.

My cousins were red guards isnt that nice?

Most Chinese elites are investing in NYC, with this same technique.

Culturally objects have value, which should explain to a westerner why we have affinity for 24 karat gold.

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Re: Chinese property bubble?

Post by Sandtrap » Thu Aug 22, 2019 11:36 am

1 This attitude and method of shared purchase (hui) is partially cultural and common amongst many Asian economies, including Philipines, etc.
2 Leasehold purchase was common many years ago in Hawaii. It was a way for folks to purchase property cheaply and then "pay rent/lease" the land for a certain number of years. At which time the lease would be renewed, etc. IE: still today, Bishop Estate, etc.
3 As with the government of China, historically dynastic, as well as the people, there's a long long pervasive view and approach to things that are almost incomprehensible to the Western mind and business culture.

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Re: Chinese property bubble?

Post by Sandtrap » Thu Aug 22, 2019 11:42 am

retire2022 wrote:
Thu Aug 22, 2019 11:29 am
Op my great grandfather built the family estate and had a store.

Both lost because of the Japanese, first store all goods were eaten.

Uncle was deeded the house but moved to Guandong because jobs in urban center.

Because he was deemed landowner aka bourgeoisie he was sent to reeducation camp.

My cousins were red guards isnt that nice?

Most Chinese elites are investing in NYC, with this same technique.

Culturally objects have value, which should explain to a westerner why we have affinity for 24 karat gold.
In Hawaii, there can be entire swaths of very expensive R/E where on the surface looks like 1-3 blocks of high rises and business buildings. But, underneath, there's just one name on the tax map and it will likely be a Japanese or Chinese family trust. Leasehold.

And, what may have been 50 acres of farmland owned by a post war Japanese family with a fruit stand up front, is now an entire street of high rise apartment buildings and condo's. Ownership? Yep. Same thing.

As I stated in my other post.
This type of aquisition and holding for a very very long game, generational, is cultural.

j
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Re: Chinese property bubble?

Post by student » Thu Aug 22, 2019 12:03 pm

Caduceus wrote:
Wed Aug 21, 2019 9:26 pm
- But because they think of these assets as investment properties, they are unwilling to use/stay in the house too much themselves!!!
:shock:

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Re: Chinese property bubble?

Post by sergio » Thu Aug 22, 2019 12:05 pm

TomCat96 wrote:
Thu Aug 22, 2019 11:15 am

You have an entire generation of Chinese people who have poured their family wealth into something destined to be worth zero.
While I was in China the thing that struck me most was the sense of urgency that so many people still have to buy a house (condo) before "prices go up".

It's understandable that the prime locations in Beijing/Shanghai/Guangzhou/Shenzhen will be very expensive. But prices have exploded even in second/third tier cities in the last 10-20 years. It's not uncommon that nowadays a mortgage payment eats up 70% of a family's take home pay, and this is after putting down 33%+ up front. And there's endless construction going on putting up more and more and more 30+ story towers. All while the birth rate is at an all time low and immigration is pretty much zero. I guess I just don't understand the end game.

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Re: Chinese property bubble?

Post by nexesn » Thu Aug 22, 2019 12:07 pm

Caduceus wrote:
Wed Aug 21, 2019 9:26 pm
I just returned from China and it was really fascinating to hear the locals explain the way they buy property. Here were my key takeaways and I am still amazed by it:

- Many Chinese people don't like equities/trust the stock market. They see property as something concrete, something they won't lose money on. The only "sure" investment, for them, is to own property. So you have a country with a crazy high savings rate, with little else to invest in, pouring everything into the real estate market, eschewing equities/bonds.

How long can this go on for?
You should get the book “China’s Great Wall of Debt”. Really interesting read about China’s internal economics.

Credit goes to Sandtrap for the book suggestion.

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Re: Chinese property bubble?

Post by alter » Thu Aug 22, 2019 12:12 pm

There is no private property ownership in China. All of it is leased from the government. Very long lease terms but leased nonetheless.

Imagine leasing a car as an investment hoping someone will assume your car lease for more than you paid and not using it...
Last edited by alter on Thu Aug 22, 2019 12:18 pm, edited 1 time in total.

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Re: Chinese property bubble?

Post by abuss368 » Thu Aug 22, 2019 12:13 pm

nedsaid wrote:
Wed Aug 21, 2019 9:47 pm
Do an internet search for ghost cities in China. From what I have read, these "ghost cities" are not uninhabited but underpopulated. The estimate is that there are 50 such underpopulated cities in China.
Was going to recommend this. I have watched a few Youtube videos on ghost cities and malls in Chna. Beyond incredible.
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Re: Chinese property bubble?

Post by alex_686 » Thu Aug 22, 2019 12:16 pm

Sandtrap wrote:
Thu Aug 22, 2019 11:42 am
As I stated in my other post.
This type of aquisition and holding for a very very long game, generational, is cultural.
I wouldn’t use cultural. You can also find this ownership structure in England and parts of America. Through often it is the government who owns the land.

boogiehead
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Re: Chinese property bubble?

Post by boogiehead » Thu Aug 22, 2019 12:20 pm

Interesting ... does anyone know what the property taxes are like?

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Re: Chinese property bubble?

Post by THY4373 » Thu Aug 22, 2019 12:25 pm

alex_686 wrote:
Thu Aug 22, 2019 12:16 pm
Sandtrap wrote:
Thu Aug 22, 2019 11:42 am
As I stated in my other post.
This type of aquisition and holding for a very very long game, generational, is cultural.
I wouldn’t use cultural. You can also find this ownership structure in England and parts of America. Through often it is the government who owns the land.
Yep the old US Embassy in London (where my Dad was posted many years ago) was one of the few where the US didn't own the land. But rather had a 999 year leasehold. http://londinoupolis.blogspot.com/2013/ ... ondon.html .

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Re: Chinese property bubble?

Post by ohai » Thu Aug 22, 2019 12:26 pm

Yes, this Chinese real estate trend is troubling. There are a few other weird things to mention:

1) In China, there is an oversupply of men relative to women due to the One Child policy, creating competition for men to attract wives. The Chinese are notoriously materialistic, and furthermore, there is an expectation that a potential husband should at least own some real estate to prove his worthiness. This increases property demand and creates more motivation for families to pool money to buy condos.

2) Property taxes are low or non-existent for most Chinese houses and apartments. Due to very low carrying costs, investors are comfortable leaving condos vacant indefinitely.

3) Perhaps the weirdest thing is that developers are apparently given government subsidies for construction projects in some areas, based on the number of floors. So, they end up building tall buildings with no real demand, or sometimes, they just build extra floors on top of some old buildings in an ad hoc manner.

4) Construction quality, as expected, is not too great sometimes. You can find a lot of pictures where Chinese buildings just fell down...

So, yeah, I don't know how this will turn out, but it's probably not great for the long term.

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Re: Chinese property bubble?

Post by unclescrooge » Thu Aug 22, 2019 12:26 pm

alex_686 wrote:
Thu Aug 22, 2019 12:16 pm
Sandtrap wrote:
Thu Aug 22, 2019 11:42 am
As I stated in my other post.
This type of aquisition and holding for a very very long game, generational, is cultural.
I wouldn’t use cultural. You can also find this ownership structure in England and parts of America. Through often it is the government who owns the land.
Mobile home parks in the US follow the same structure, as do properties sold by the Irvine company in California.

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Re: Chinese property bubble?

Post by Day9 » Thu Aug 22, 2019 12:29 pm

How do we make this topic actionable? I would guess literally zero Bogleheads would invest in Chinese real estate. But we do invest in emerging market stocks. Emerging Markets are roughly 10% of global market cap so many bogleheads have that as their allocation. VWO Vanguard Emerging Markets is about 55% "Asia Emerging" according to morningstar (and 15% "Asia Developed" -- maybe there is disagreement on whether some countries like South Korea or Taiwan are developed or emerging).

VWO Top 6 holdings:
Tencent (Chinese tech/entertainment) 4.74%
Alibaba (Chinese google) 3.61%
Taiwan Semiconductor 2.2%
Naspers (South Africa) 1.85%
Taiwan Semiconductor 1.34%
China Construction Bank 1.26%

So it looks like we have a 0.126% allocation to China Construction Bank in our equity side if we are cap weighted. Not exactly a huge overexposure. I am not familiar with this company. Are they involved in some of these "ghost cities"? Tencent and Alibaba have a little bigger share of our holdings.

I am hoping that all of the concerns raised in this thread are already baked into the price, and that is reflected in the gap in valuations between emerging markets and US stocks.
VWO has P/E of 15 and P/B of 1.7
VTI has a P/E of 25 and P/B of 3.3
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Re: Chinese property bubble?

Post by Tyler Aspect » Thu Aug 22, 2019 12:32 pm

Well, that situation could last a while. House price are not marked to market at a frequent interval. If units do not sell the price just remain elevated with no buyers.
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Re: Chinese property bubble?

Post by abuss368 » Thu Aug 22, 2019 12:35 pm

China is a good piece of the Vanguard International REIT Fund.
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Re: Chinese property bubble?

Post by KlangFool » Thu Aug 22, 2019 12:38 pm

Folks,

When you asked the wrong question, you will never get the right answer!

1) Is there any other alternative for the mainland Chinese to save and store their value?

2) What is the impact of this amount of money on the global economy?

https://www.forbes.com/sites/lisachamof ... a09fa636a5

3) How does this impact my personal finance?

A) The 2 largest groups of people buying houses in my neighborhood are the Indians and the Chinese. The specific section of my area is zoned for the top 10 high schools in Virginia. So, it sells very well and quickly.

B) Unfortunately, many of the pre-2006 houses are not designed for Asian cooking. So, their house value will never go up due to this new group of buyers.

C) A large number of townhouses in my neighborhood has a staircase facing the front door. This is a big no-no for Fengshui (Chinese). Hence, only Indians buy those houses.

KlangFool

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Re: Chinese property bubble?

Post by retire2022 » Thu Aug 22, 2019 12:42 pm

alter wrote:
Thu Aug 22, 2019 12:12 pm
There is no private property ownership in China. All of it is leased from the government. Very long lease terms but leased nonetheless.

Imagine leasing a car as an investment hoping someone will assume your car lease for more than you paid and not using it...
The building is private the land is not, this
has been since 1948 when the communists took over. It may change again.

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Re: Chinese property bubble?

Post by physixfan » Thu Aug 22, 2019 12:44 pm

It's so sad. It is clearly a bubble in my opinion, but I understand why Chinese people believe in real estate market.

The housing price has been stronger and stronger for more than 20 years, that's basically many people's whole life, entire memory.

Another aspect is the income growth in China during the past 30 years. I remember when I was 10, my household income is somewhere like $600/month (converted to USD). Now 15 years later, my parents' income is somewhere like $3,000/month. That's pretty normal in China. Imagine if you invested in a house for which the mortgage takes ~70% of your income 15 years ago, that number is basically nothing now.

I remember in 2015, I attended a lecture talking about housing bubble in China. Basically based on every single sign, that's a clear bubble. But guess what happened in 2016? The housing price doubled in almost every tier-1 and tier-2 cities in one year. That was insane. But that made people more anxious about housing price will only go up.

I hope there will be a good end about this bubble. The government is now trying to make the housing price a horizontal line: neither go up or go down. I hope they can make it.
Last edited by physixfan on Thu Aug 22, 2019 12:47 pm, edited 5 times in total.

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Re: Chinese property bubble?

Post by almostretired1965 » Thu Aug 22, 2019 12:45 pm

It is definitely a Chinese thing. I'm from Taiwan originally (but my dad was born on the mainland) and on my mother's side of the family, there is a, to me at least, an irrational desire to own and speculate on real estate. My aunt managed to bankrupt herself twice over the years speculating. Growing up I remember how my parents lost several thousand dollars on a $10K lot in a swamp in Florida that they got talked into buying because all their Chinese friends were going in on it.

Part of it comes from the fact that in many high population density locales (Tokyo, Hong Kong, Singapore comes immediately to mind), with limited space, owning real estate worked out really well. Basically if you are able to forecast/identify correctly that some location with limited space and/or regulatory obstacles that limit new construction will experience high economic growth over the course of a decade or two, then the surest way to capture the economic rent that arises is to invest in real estate in that area. This is basically the story in Silicon Valley/Bay Area. In aggregate, I suspect the land owners probably did as well as the venture capitalists, and which job do you think was easier? The problem is when people see this and think that this mechanism will work anywhere, or for some particular location, the future will always look like the past, etc.

In China, I think it will run a little longer, but sooner or later, the collapsing birth rate will hit. Like any other bubble, don't be the guy left holding the bag.

A

Caduceus wrote:
Wed Aug 21, 2019 9:26 pm
I just returned from China and it was really fascinating to hear the locals explain the way they buy property. Here were my key takeaways and I am still amazed by it:

- Many Chinese people don't like equities/trust the stock market. They see property as something concrete, something they won't lose money on. The only "sure" investment, for them, is to own property. So you have a country with a crazy high savings rate, with little else to invest in, pouring everything into the real estate market, eschewing equities/bonds.

- But property prices, which are very high, are often out of a single person's reach, so entire families - and by that, I mean extended families - will pitch in to buy a property. Uncles and aunts and parents and second and third cousins, etc. All pooling their money to buy one property. And it gets better - these are understood as "loans" to one another in expectation of a profit. So they expect to split the profits according to their share of the property. And this represents essentially, say, 70% or more of the collective net worth of one person's extended family.

- But because they think of these assets as investment properties, they are unwilling to use/stay in the house too much themselves!!! And there are way more properties than renters, so when I visited my friend, I was amazed that he said the entire apartment complex was bought up, but more than half the units were EMPTY. That's just nuts. So Chinese citizens are buying properties that they don't use themselves for fear of devaluing/damaging the unit. And they are skeptical about renters because they don't want renters to damage the unit (or perhaps they can't find renters).

The whole thing sounds like a recipe for disaster. A country with an excess of liquid savings, with an irrationally strong preference for real estate relative to equities/bonds/international assets, regardless of valuations. Entire households - not just individuals - with a concentrated, undiversified position in one asset. And on top of that, owning houses that sit empty instead of collecting rent, in the hopes of cashing in on speculative price gains by reselling the property.

Oh, and I was told that Chinese properties are mainly leasehold for sixty years. So the depreciation curve will get very steep at some point?

How long can this go on for?
Last edited by almostretired1965 on Thu Aug 22, 2019 12:48 pm, edited 1 time in total.

thx1138
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Re: Chinese property bubble?

Post by thx1138 » Thu Aug 22, 2019 12:46 pm

Day9 wrote:
Thu Aug 22, 2019 12:29 pm
How do we make this topic actionable? I would guess literally zero Bogleheads would invest in Chinese real estate.
Some of us ended up with it nonetheless (inheritance) and would potentially need to evaluate whether to sell or hold and on what timescale.

The insanity has been clear for awhile and I couldn't wait to get out. Thankfully we are out of it for a few years now. The whole time I was just waiting for either the market to collapse or more severe capital controls to be put in trapping the proceeds in the country.

Anyway, you don't actually get to choose what all of your investments are...

Day9
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Re: Chinese property bubble?

Post by Day9 » Thu Aug 22, 2019 12:55 pm

thx1138 wrote:
Thu Aug 22, 2019 12:46 pm
Day9 wrote:
Thu Aug 22, 2019 12:29 pm
How do we make this topic actionable? I would guess literally zero Bogleheads would invest in Chinese real estate.
Some of us ended up with it nonetheless (inheritance) and would potentially need to evaluate whether to sell or hold and on what timescale.

The insanity has been clear for awhile and I couldn't wait to get out. Thankfully we are out of it for a few years now. The whole time I was just waiting for either the market to collapse or more severe capital controls to be put in trapping the proceeds in the country.

Anyway, you don't actually get to choose what all of your investments are...
Thanks for sharing your experience. I apologize for oversimplfying the Bogleheads.
I'm just a fan of the person I got my user name from

alter
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Re: Chinese property bubble?

Post by alter » Thu Aug 22, 2019 1:05 pm

retire2022 wrote:
Thu Aug 22, 2019 12:42 pm
alter wrote:
Thu Aug 22, 2019 12:12 pm
There is no private property ownership in China. All of it is leased from the government. Very long lease terms but leased nonetheless.

Imagine leasing a car as an investment hoping someone will assume your car lease for more than you paid and not using it...
The building is private the land is not, this
has been since 1948 when the communists took over. It may change again.
The building is useless if you no longer own the land, buildings are not something you can relocate to other land in a cost effective way, so for all intents and purposes, it's not really owned by you either.

sergio
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Re: Chinese property bubble?

Post by sergio » Thu Aug 22, 2019 1:10 pm

thx1138 wrote:
Thu Aug 22, 2019 12:46 pm
Day9 wrote:
Thu Aug 22, 2019 12:29 pm
How do we make this topic actionable? I would guess literally zero Bogleheads would invest in Chinese real estate.
Some of us ended up with it nonetheless (inheritance) and would potentially need to evaluate whether to sell or hold and on what timescale.

The insanity has been clear for awhile and I couldn't wait to get out. Thankfully we are out of it for a few years now. The whole time I was just waiting for either the market to collapse or more severe capital controls to be put in trapping the proceeds in the country.

Anyway, you don't actually get to choose what all of your investments are...
Actually, my wife and I have loosely thrown around the idea of buying a very small condo in her hometown in China, as we visit twice a year with a small child, and renting/hotels suck. The thing is, in 2008 we probably could've gotten a decent place for $30-40k. Nowadays we'd be looking at $120k+.

retire2022
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Location: NYC

Re: Chinese property bubble?

Post by retire2022 » Thu Aug 22, 2019 1:11 pm

alter wrote:
Thu Aug 22, 2019 1:05 pm

The building is useless if you no longer own the land, buildings are not something you can relocate to other land in a cost effective way, so for all intents and purposes, it's not really owned by you either.
My distance cousin asked my uncle for funds to fix the roof, my distance cousin since passed.

Hence adverse procession equates to squatter rights, if China was smart like the British and allowed free immigration and trade the planet would be speaking mandarin and writing chinese instead of English.

I’m pleased to be here if my
Great grandfather was smart my family would had been Canadian.

Tigermoose
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Re: Chinese property bubble?

Post by Tigermoose » Thu Aug 22, 2019 1:23 pm

Well, if this bubble bursts you will see not only a collapse of Chinese real estate, but you will see a serious decline in U. S. real estate - especially on the West Coast and other areas popular with Asian buyers. Chinese buyers will be forced to liquidate their holdings in the US to cover their exposure in China.
Institutions matter

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Caduceus
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Re: Chinese property bubble?

Post by Caduceus » Thu Aug 22, 2019 1:41 pm

What I find fascinating is I don't understand where the wealth is going. If Chinese buyers are overpaying for properties, than presumably the sellers of those properties - the real estate development companies - should be raking in cash. But they seem to be up to their eyeballs in debt and the stock prices of these companies have taken a hit for that reason. Something does not seem to add up here - where is the excess cash-over-true-value going to? Someone must be pocketing it, as this is essentially (if this is really a bubble) a transfer of wealth from one party to another.

Or perhaps the owners of these real estate companies are taking all the excess as personal income.

TomCat96
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Re: Chinese property bubble?

Post by TomCat96 » Thu Aug 22, 2019 2:07 pm

Tigermoose wrote:
Thu Aug 22, 2019 1:23 pm
Well, if this bubble bursts you will see not only a collapse of Chinese real estate, but you will see a serious decline in U. S. real estate - especially on the West Coast and other areas popular with Asian buyers. Chinese buyers will be forced to liquidate their holdings in the US to cover their exposure in China.

Would that really happen?
If I were a rich Chinese tycoon, liquidating my foreign holdings in the last thing I would do.
My foreign real estate here in the states would have been taken as a means of wealth preservation, not subject to confiscation by the Chinese government or Chinese creditors.

It's my safety net.
Last edited by TomCat96 on Thu Aug 22, 2019 2:14 pm, edited 1 time in total.

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simplesimon
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Re: Chinese property bubble?

Post by simplesimon » Thu Aug 22, 2019 2:13 pm

If you live in a major city with new high rises going up take a look at who are buying the new units. A recent article in the Boston Globe about the Millennium Tower in Boston showed that a majority of buyers (I want to say over 70%, currently paywalled) were Chinese buyers and the units are unoccupied. I walk by there daily for work and it's definitely not bustling like a you'd expect for a building with over 400 units.

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unclescrooge
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Re: Chinese property bubble?

Post by unclescrooge » Thu Aug 22, 2019 2:25 pm

KlangFool wrote:
Thu Aug 22, 2019 12:38 pm
Folks,

When you asked the wrong question, you will never get the right answer!

1) Is there any other alternative for the mainland Chinese to save and store their value?

2) What is the impact of this amount of money on the global economy?

https://www.forbes.com/sites/lisachamof ... a09fa636a5

3) How does this impact my personal finance?

A) The 2 largest groups of people buying houses in my neighborhood are the Indians and the Chinese. The specific section of my area is zoned for the top 10 high schools in Virginia. So, it sells very well and quickly.

B) Unfortunately, many of the pre-2006 houses are not designed for Asian cooking. So, their house value will never go up due to this new group of buyers.

C) A large number of townhouses in my neighborhood has a staircase facing the front door. This is a big no-no for Fengshui (Chinese). Hence, only Indians buy those houses.

KlangFool
Interesting.
I just read an article today about how US investors are under exposed to Chinese equities.

This post would indicate that Chinese investors are also under exposed!

What distinguishes an Asian kitchen?

KlangFool
Posts: 14113
Joined: Sat Oct 11, 2008 12:35 pm

Re: Chinese property bubble?

Post by KlangFool » Thu Aug 22, 2019 2:27 pm

unclescrooge wrote:
Thu Aug 22, 2019 2:25 pm
KlangFool wrote:
Thu Aug 22, 2019 12:38 pm
Folks,

When you asked the wrong question, you will never get the right answer!

1) Is there any other alternative for the mainland Chinese to save and store their value?

2) What is the impact of this amount of money on the global economy?

https://www.forbes.com/sites/lisachamof ... a09fa636a5

3) How does this impact my personal finance?

A) The 2 largest groups of people buying houses in my neighborhood are the Indians and the Chinese. The specific section of my area is zoned for the top 10 high schools in Virginia. So, it sells very well and quickly.

B) Unfortunately, many of the pre-2006 houses are not designed for Asian cooking. So, their house value will never go up due to this new group of buyers.

C) A large number of townhouses in my neighborhood has a staircase facing the front door. This is a big no-no for Fengshui (Chinese). Hence, only Indians buy those houses.

KlangFool
Interesting.
I just read an article today about how US investors are under exposed to Chinese equities.

This post would indicate that Chinese investors are also under exposed!

What distinguishes an Asian kitchen?
Ventilation.

KlangFool

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simplesimon
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Location: Boston, MA

Re: Chinese property bubble?

Post by simplesimon » Thu Aug 22, 2019 2:29 pm

KlangFool wrote:
Thu Aug 22, 2019 2:27 pm
unclescrooge wrote:
Thu Aug 22, 2019 2:25 pm
KlangFool wrote:
Thu Aug 22, 2019 12:38 pm
Folks,

When you asked the wrong question, you will never get the right answer!

1) Is there any other alternative for the mainland Chinese to save and store their value?

2) What is the impact of this amount of money on the global economy?

https://www.forbes.com/sites/lisachamof ... a09fa636a5

3) How does this impact my personal finance?

A) The 2 largest groups of people buying houses in my neighborhood are the Indians and the Chinese. The specific section of my area is zoned for the top 10 high schools in Virginia. So, it sells very well and quickly.

B) Unfortunately, many of the pre-2006 houses are not designed for Asian cooking. So, their house value will never go up due to this new group of buyers.

C) A large number of townhouses in my neighborhood has a staircase facing the front door. This is a big no-no for Fengshui (Chinese). Hence, only Indians buy those houses.

KlangFool
Interesting.
I just read an article today about how US investors are under exposed to Chinese equities.

This post would indicate that Chinese investors are also under exposed!

What distinguishes an Asian kitchen?
Ventilation.

KlangFool
Lack of ventilation or a presence of staircase does not seem to be stopping Chinese property buyers in this area at least.

retire2022
Posts: 950
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Location: NYC

Re: Chinese property bubble?

Post by retire2022 » Thu Aug 22, 2019 2:43 pm

USA investors has consumer economy which Chinese investors do not.

Hence Chinese investors has manufacturing and greater savings rates than Americans and greater GDP.

We shall see what plays out in the global economy in the future.

KlangFool
Posts: 14113
Joined: Sat Oct 11, 2008 12:35 pm

Re: Chinese property bubble?

Post by KlangFool » Thu Aug 22, 2019 2:59 pm

simplesimon wrote:
Thu Aug 22, 2019 2:29 pm
KlangFool wrote:
Thu Aug 22, 2019 2:27 pm
unclescrooge wrote:
Thu Aug 22, 2019 2:25 pm
KlangFool wrote:
Thu Aug 22, 2019 12:38 pm
Folks,

When you asked the wrong question, you will never get the right answer!

1) Is there any other alternative for the mainland Chinese to save and store their value?

2) What is the impact of this amount of money on the global economy?

https://www.forbes.com/sites/lisachamof ... a09fa636a5

3) How does this impact my personal finance?

A) The 2 largest groups of people buying houses in my neighborhood are the Indians and the Chinese. The specific section of my area is zoned for the top 10 high schools in Virginia. So, it sells very well and quickly.

B) Unfortunately, many of the pre-2006 houses are not designed for Asian cooking. So, their house value will never go up due to this new group of buyers.

C) A large number of townhouses in my neighborhood has a staircase facing the front door. This is a big no-no for Fengshui (Chinese). Hence, only Indians buy those houses.

KlangFool
Interesting.
I just read an article today about how US investors are under exposed to Chinese equities.

This post would indicate that Chinese investors are also under exposed!

What distinguishes an Asian kitchen?
Ventilation.

KlangFool
Lack of ventilation or a presence of staircase does not seem to be stopping Chinese property buyers in this area at least.
1) To be precise, a staircase facing the front door.

2) Only if they do not have a better alternative for that location.

KlangFool

gougou
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Location: San Francisco Bay Area

Re: Chinese property bubble?

Post by gougou » Thu Aug 22, 2019 3:00 pm

Caduceus wrote:
Thu Aug 22, 2019 1:41 pm
What I find fascinating is I don't understand where the wealth is going. If Chinese buyers are overpaying for properties, than presumably the sellers of those properties - the real estate development companies - should be raking in cash. But they seem to be up to their eyeballs in debt and the stock prices of these companies have taken a hit for that reason. Something does not seem to add up here - where is the excess cash-over-true-value going to? Someone must be pocketing it, as this is essentially (if this is really a bubble) a transfer of wealth from one party to another.

Or perhaps the owners of these real estate companies are taking all the excess as personal income.
The wealth mostly goes to the government and some to the developers. Chinese government sells land to developers to fund government expenditures. China does not have property tax so selling land is an important source of income for local government.

See https://zh.wikipedia.org/wiki/%E5%9C%9F ... 2%E6%94%BF (unfortunately I couldn't find an English version so you'll have to translate it)

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simplesimon
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Re: Chinese property bubble?

Post by simplesimon » Thu Aug 22, 2019 3:11 pm

KlangFool wrote:
Thu Aug 22, 2019 2:59 pm
simplesimon wrote:
Thu Aug 22, 2019 2:29 pm
KlangFool wrote:
Thu Aug 22, 2019 2:27 pm
unclescrooge wrote:
Thu Aug 22, 2019 2:25 pm
KlangFool wrote:
Thu Aug 22, 2019 12:38 pm
Folks,

When you asked the wrong question, you will never get the right answer!

1) Is there any other alternative for the mainland Chinese to save and store their value?

2) What is the impact of this amount of money on the global economy?

https://www.forbes.com/sites/lisachamof ... a09fa636a5

3) How does this impact my personal finance?

A) The 2 largest groups of people buying houses in my neighborhood are the Indians and the Chinese. The specific section of my area is zoned for the top 10 high schools in Virginia. So, it sells very well and quickly.

B) Unfortunately, many of the pre-2006 houses are not designed for Asian cooking. So, their house value will never go up due to this new group of buyers.

C) A large number of townhouses in my neighborhood has a staircase facing the front door. This is a big no-no for Fengshui (Chinese). Hence, only Indians buy those houses.

KlangFool
Interesting.
I just read an article today about how US investors are under exposed to Chinese equities.

This post would indicate that Chinese investors are also under exposed!

What distinguishes an Asian kitchen?
Ventilation.

KlangFool
Lack of ventilation or a presence of staircase does not seem to be stopping Chinese property buyers in this area at least.
1) To be precise, a staircase facing the front door.

2) Only if they do not have a better alternative for that location.

KlangFool
True - although both of these things can be modified.

metroguy
Posts: 3
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Re: Chinese property bubble?

Post by metroguy » Thu Aug 22, 2019 3:22 pm

The 70 yr land lease is noise. When you compare 0 property taxes in China vs usa 1% property tax, after 70 yrs, it’s equivalent. After 70 yrs, the USA person would have spent an extra 100% of market value vs China property investor who would depreciated property to 0. Net net is the same. Of course, this would not apply to someone who bought it at less than 70 yrs. note, there was talk of removing the 70 yrs and maybe replacing it with property tax.

As for whether it’s a bubble or not, if you were to bet against the bubble(by not buying property), you would have lost out big time. The losers were the people who are waiting for the bubble to pop for the last 30 yrs. I doubt they can afford the it now.

And yes there are lots of empty apts. it doesn’t make sense to rent it out because the rent is too low relative to the value. There really is no other choice for savings. If you got the money in China, where are you going to put it. Saving account is less than inflation. Stocks are crooked. Bonds are difficult to buy. Lots of investments are pyramid schemes. Safest investment asset is a property

gougou
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Location: San Francisco Bay Area

Re: Chinese property bubble?

Post by gougou » Thu Aug 22, 2019 3:32 pm

The 70 year lease doesn't mean a property will depreciate to 0 after it expires. Even though it is a lease in name, Chinese government cannot and will not confiscate properties and expel residents when the leases run out. It will have to pass a property tax law that people are willing to accept, otherwise people will continue living in their homes with an expired lease (which is happening already).

It just means that before the lease runs out you are guaranteed not having to pay any property taxes. And when the lease expires you'll probably pay something that is affordable to most property owners.

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unclescrooge
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Re: Chinese property bubble?

Post by unclescrooge » Thu Aug 22, 2019 3:34 pm

KlangFool wrote:
Thu Aug 22, 2019 2:27 pm
unclescrooge wrote:
Thu Aug 22, 2019 2:25 pm

What distinguishes an Asian kitchen?
Ventilation.

KlangFool
So they want a high CFM hood exhausted to the outside, vs a microwave fan that just recirculates?

ohai
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Re: Chinese property bubble?

Post by ohai » Thu Aug 22, 2019 3:35 pm

I don't know about the staircases, but I've never heard of Asian buyers not wanting kitchens that are not Asian enough. Perhaps they favor open kitchen layouts, but it seems that most modern buyers favor that layout, non Asians included. What I do think the Chinese in particular care about is addresses and unit numbers, as they will favor lucky numbered places and not want unlucky numbered ones.

KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Chinese property bubble?

Post by KlangFool » Thu Aug 22, 2019 3:42 pm

unclescrooge wrote:
Thu Aug 22, 2019 3:34 pm
KlangFool wrote:
Thu Aug 22, 2019 2:27 pm
unclescrooge wrote:
Thu Aug 22, 2019 2:25 pm

What distinguishes an Asian kitchen?
Ventilation.

KlangFool
So they want a high CFM hood exhausted to the outside, vs a microwave fan that just recirculates?
Correct!

KlangFool

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