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Regular Joe Investor
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I am not a financial professional. I invest a little money on the side. I’m a small timer. Just an average Joe. And these are just my observations and opinions.
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  • A Typical Apartment In Shanghai Costs More Than 45 Times The Average Residents Salary.

    So what started out as a comment on Seeking Alpha has turned into an official Seeking Alpha Instablog article. I'm going to discuss my observations and opinions regarding the housing bubble in China, and what I expect to happen sometime in the near future. I am not a financial professional. I invest a little money on the side. I'm a small timer. Just an average Joe. And these are just my observations and opinions. I am certainly not trying to hurt or offend anyone. Thank you.

    There is currently an oversupply of housing in China. Nowhere else in the world has there been so much construction for residential housing, commercial, and office space than there has been in China the last 10 years. This has led to a huge surplus in housing. And nowhere else in the world are there entire Ghost Cities as there is found in China.

    In the well known 60 minute article, China Vanke Co.'s Wang Shi states that yes, there is a Real Estate Bubble in China. And when asked if the typical apartment in Shanghai was 45 times the average residents salary…Mr. Wang Shi said that it was even higher…and he went on to say it was dangerous.

    If the typical apartment in Shanghai costs more than 45 times the average residents salary, then I think it's safe to say that mathematically, the average resident in Shanghai who doesn't already have a house…cannot afford to buy one today…

    So, if the average resident in Shanghai is not able to buy the typical apartment, then the next question is…who is buying up all the apartments there?

    The rich, maybe some real estate investors, Chinese companies investing its money in Chinese apartments, REIT's, and lastly the corrupt and unlawful who have amassed their fortunes in dishonest ways. These corrupt and unlawful rich individuals include but are not limited to select Chinese government officials, bankers, and business persons. I am certainly not here to say that all Chinese government officials, bankers, and business persons corrupt but unlawful, but in China, there appear to be quite a number of these individuals who are buying way more than their share of apartments in China, and thus artificially driving up the costs significantly.

    And these Chinese government officials, bankers, and business persons who could afford to buy the apartments in Shanghai…if they followed regulations…they would only be allowed to buy a certain number of apartments in Shanghai as well as other cities…right?

    Because in Shanghai and other cities…China has initiated housing curbs in the past in order to rein in speculation in housing…and the subsequent soaring housing prices.

    These housing curbs initiated by the Chinese Government include raising the down-payment mortgage requirements, increasing construction of low-cost social housing, and restricting home purchases in about 40 cities.

    I think increasing the construction of low-cost social housing probably wouldn't really affect the property market, because, again, the average Chinese resident cannot afford an apartment anyways. But providing special low-cost social housing will satisfy one of the basic needs for those who need but cannot afford housing in China.

    However, not everyone follows the rules. There are so many articles on how some corrupt or unlawful Chinese are somehow averting the rules and buying more properties than they are allowed to buy. In one instance, a banker from the northern province of Shaanxi was able to amass a property Portfolio of over 41 apartments in Beijing by forging or illegally purchasing documents. And this is just a Banker, and not someone with even more power or authority in China. If just a typical banker could get away with what she has, just imagine what others are able to do. The corruption in China is extreme. And that is another article in of itself.

    Chinese President Xi Jinping is on a crusade to purge these corrupt Chinese officials. The corruption in the Chinese Government is immense. Please Google Chinese Corrupt Officials to see a slew of articles covering this in depth, as well as to see what Chinese President Xi Jinping is doing to combat it. This will lead to a decrease in the number of wealthy corrupt Chinese officials who are buying up all the excess housing in China.

    I believe that a lot of the Housing in China is being illegally purchased by individuals and companies who can afford to buy up all the properties for sale. These individuals and corporate companies investing its money are illegally buying more homes than they are supposed to. The time line for developing and implementing the Unified Property Registration System varies depending on the source. The purpose of the Unified Property Registration System is to curb corruption and unlawful activities, and this will keep someone from buying more homes than they are supposed to. The new Unified Property Registration System will allow one unified system to track all properties that are bought or sold, and in this manner, the Chinese Government will be able to locate corrupt Chinese officials or anyone else who may be unlawfully buying or selling apartments in mass. The new Unified Property Registration System will also allow the Chinese Government to keep track of how many properties every individual buys, thus allowing it to enforce the number of properties they may buy.

    Demand is slowing because the people who can afford to buy houses in China have already bought one. Otherwise, the people who have not yet bought a house can not afford to buy one.

    Individuals who have wrongfully purchased houses in any manner are currently listing their properties to sell before the new Unified Property Registration System takes place later this year. This is important because the new Unified Property Registration System will catch those corrupt or unlawful home owners if they still own more homes than they are supposed once the system goes live. As a result, these unlawful individuals are in a race to sell all of their ill gotten homes, and invest their money over seas in another country.

    As a result of the Unified Property Registration System, those individual who wrongfully amassed their real estate fortunes in China who are not discovered, will have to invest in further real estate ventures outside of China. Thus the huge increase in Chinese foreign real estate investments in United State, Europe, and Australia among other countries as compared to last year.

    As for the lawful rich, who are able to buy houses in China, they can sense the Real Estate Bubble that they are in over in China. As they are now also looking to invest their money over seas. Overseas investments have increased significantly from last year. And all this investment money flowing out of China is only going to further hurt the sales of homes in China.

    I do not have a financial back ground, but I do invest in Real Estate in the United States. I have ready as many books in real estate as I could over my 10 years as a real estate investor. So real estate and real estate investing is something I feel like I know a little about.

    And I believe that investing in empty homes is like burying money into the ground. Anyone who has ever owned a House knows that houses Deteriorate and will need maintenance over time. And this is something the Chinese who buy houses for investment purposes do not appear to be thinking about at this time. Most Chinese developments do not even have Home Owner's Association dues, and this is puzzling to me. Because what happens when the elevator breaks down? Someone has to pay to repair it. And buildings need to be repainted, roofs need to be maintained, and the HVAC needs servicing...and on and on...and as to the service bills? Someone has to pay...right? If not the homeowners, then who? So all of these maintenance costs are homeowner's responsibilities.

    The Chinese who are buying up the apartments appear to be investing for price appreciation, and real estate investors know that you invest for cash flow and not for price appreciation. Price appreciation is just a bonus you may get over a long period of time investing in real estate and should never be the primary reason for investing in real estate. And when you invest for price appreciation, it's not really investing…its speculation…as you are speculating that the price of housing will go up in the future. As a real estate investor, I rely on my tenants to pay my carrying costs for my rentals as well as provide me with a healthy positive cash flow every month.

    There is less and less land available to sell in China and this is where cities get upwards of 60% of their revenues. So the Cities in China will need at some point, come up with another source of Revenue…which will eventually lead to Property Taxes. And every real estate investor knows that an empty home with Property Taxes is a money losing proposition. And if the Cities do nothing…then, in the end…they'll run out of money…

    There will be less and less land to build on over time in China. And the land available to build will continue to get more expensive to buy over time. And there will come a time when the cost of the land will be so high…that it will not make financial sense for the real estate development companies to continue to operate.

    More expensive land, coupled with a discounted property Market is signaling the end for many Real Estate Developers in China. And as housing sales slow in China, it will affect the housing materials industry as well. And since the housing industry is such a huge part of the Chinese economy…ultimately the entire Chinese economy will be greatly affected by the coming real estate collapse.

    If the Real Estate Developers cannot sell the finished Residential Houses and Commercial Buildings, then the Banks will be left responsible for the outstanding loans. And the houses and buildings are really not worth that much...empty and unwanted.

    China has a Shadow Banking System which allows the less qualified Real Estate Developers to obtain loans at a higher interest rate. This just makes the less qualified Real Estate Developers even weaker by having higher carrying costs. And more and more developers are having to rely on the Shadow Banking System for their construction loans.

    China's population is hardly increasing. China has had a one child policy for the last 35 years.

    My take on urbanization is that yes, the Chinese population is moving from the Rural Areas to the Urban cities, but this doesn't help the Chinese real estate market since, again, the average Chinese person cannot afford to buy a home at over 45 times the average residents salary in cities like Shanghai.

    I have read that Land in China is not actually sold, but leased to Developers for up to 70 years. "Leased." And wording on the lease contracts are not clearly spelled out as to what happens when the 70 year lease term expires. So the clock is ticking…and I would think as time goes on the less value a house or property would have…kind of like a stock option with an expiration date. But instead of going down, the real estate Market has been soaring over the years.

    Moody's changed its Chinese Property Industry Outlook from Stable to Negative on 5-20-14. This should make it more difficult for Chinese Property Developers to issue bonds, and if they do issue bonds, it will be at a higher interest rate due to the lower negative outlook grade. This may lead more Chinese Real Estate Developers to obtain loans from the Chinese Shadow banking system at higher rates than in the past.

    At some point, the Chinese, who are buying up the properties in China at such a high valuation, will finally see the Real Estate Market Bubble for what it is. Because if my rental properties appreciated so that they cost even 10 times the average annual salary of a resident, I would promptly sell my properties. Because I would know that it would just be a matter of time before the real estate market came crashing back to prices at which residents could actually afford to buy a home. And, again, in Cities as in Shanghai, a typical apartment is more than 45 times the average Chinese resident's annual income. That is just astounding to me every time I think about it.

    There are some who are seeing the Chinese Real Estate Bubble for what it is and what it means. For instance, Asia's richest man has sold all of his property in China…only to invest in Europe. Li Ka-Shing has a reputation of seeing things ahead of everyone else. A question one needs to ask himself before investing in The Chinese Real Estate Market is if Li Ka-Shing is selling, why aren't you? Or another way to put it is, why are you buying when the richest man in Asia is selling.

    There are some people who continue to see growth in the Chinese Property Market as they expect the Chinese Government to lift some of the Real Estate Housing Curbs in the coming future, however, I don't feel like this will make any difference in the Chinese Real Estate Market. And if anything it's only going to make things worse, because if the Chinese Government does lift some of housing curbs, this will just be an official confirmation that the Chinese housing market is really in serious trouble. And besides, when the typical apartment is more than 45 times the average Chinese resident's annual income in cities like Shanghai, housing curbs or not, the housing is still unaffordable to the average Chinese resident.

    Due to the high cost of the housing and the lower demand for it…something has got to give and eventually the prices of housing must start to come down. And when this happens, the developers and property owners will lower their prices all at once…and nobody will buy…as most Chinese investors have been buying in anticipation of a price increase…and this will ultimately cause a housing market crash.

    Based on my findings and beliefs, I firmly believe a real estate Crash in China will happen at some point. I don't know when, but from history…we all know what happens to bubbles…

    Full Disclosure: I have Put options on CAT, CHIX, EWA, EWH, FXI, TAO.

    Disclosure: I am short CAT, CHIX, EWA, EWH, FXI, TAO.

    Additional disclosure: Full Disclosure: I have Put options on CAT, CHIX, EWA, EWH, FXI, TAO.

    May 26 1:01 AM | Link | 3 Comments
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