China Is Far From Stable - Home Prices Again Soaring

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by: Bruce Wilds

Soaring housing prices in China indicates they are "doing it again" or should at least make China watchers very suspicious of just how stable things are. This should also highlight that where wealth comes from and even more important where it is stored does matter. The housing market's role in China's economy should not be underestimated; this is where almost 75% of the country's household wealth is stored. It is important to note it is also deeply interwoven with shadow banking. Any claims that China is on a firm and solid footing is quickly brought into question by the Bloomberg chart below. The chart shows that on average new-home prices soared 21 percent in February from a year earlier. It is important to remember this is all taking place as the Chinese economy is slowing.

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Why Are Home Prices Again Soaring In China?
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This is not the making of a stable economic environment. If I'm correct, this could be a signal of massive instability. When this story is intertwined with stories of soaring defaults, stock market turmoil, and other pieces of news flowing out of China, we could take the view that those with money trapped within the country are scrambling to find a place to stash their wealth.

This all becomes part of the inflation/deflation debate and what to do when too much money is placed in the system while little or no interest is paid on savings. It also appears the masses are placing bets prices will rise even more. In response to soaring house prices in Shanghai, officials have announced stricter restrictions on buyers. This is to slow the market and halt the current speculation. Now buyers will need to show they've been in the city for five years, and some second homes will require huge down payments of at least 70 percent. An article in Bloomberg recently reported that speculation has reached a point where couples are even getting phony divorces so they can double their buying power and skirt the rules that restrict purchases to one per household.

In a previous post, I pointed out China's housing sector operates on rules, regulations, and customs that we here in America would find quite peculiar. There most apartments are sold with internal walls and electrical outlets in place but everything else, including doors, flooring, and bathroom fixtures need to be built-out by the owner after purchase. Cheap housing is something you won't find in China. Its housing market is among the most expensive in the world when compared to per capita income.

For example, the average price of housing in New York City is around $200 per square foot with an average family income of $72,000 per year. By comparison, the average cost of housing in Shanghai for the year 2007 was nearly $108 a sq. ft. against an average family income of $7,316. As for what you are buying, be aware! This YouTube video shows a man banging a hole through a concrete support pillar in an apartment building in China.

While we have no proof of where or how widespread poor construction is, we have had reports that it is not uncommon. China is full of "ghost cities" and new apartment buildings that sit empty. This should come as no surprise considering that China used a massive amount of cement during their construction boom from 2011 until 2013. This is more than the U.S. used during the entire 20th century. A troubling issue is that some officials reveal that many of these homes have an expected lifespan of just 20 years. This means that many of the housing properties in China are not constructed to stand the test of time and that buying them is just like buying worthless companies during a stock market bubble. Again, I ask you to remember this is where almost 75% of China's household wealth is stored.

Footnote: It should be noted we are also hearing and seeing reports of a far worse nature flowing out of Vancouver, Canada and several other areas. In the case of Vancouver, much of the price spike is because of Chinese buyers.