Wednesday, June 2, 2010

The Miraculous Chinese Real Estate Story

China bank adviser says property woes worse than US

At the Beijing Real Estate Expo in April, the average price of a new apartment in the Chinese capital was 21,164 yuan (3,100 dollars) per square metre, double that of last year, state media said.

That means a 90-square-metre (970 square feet) apartment in Beijing would cost 1.9 million yuan, compared with the average per capita income of 17,175 yuan in 2009.

1.9 million yuan represents 111 years of average per capita income. Could someone please tell me how this is not a miracle? We need to get the Pope over there.

Pope's sainthood setback after 'miracle cure' nun reported to be ill again

It was the miracle that set Pope John Paul II on the road to sainthood and provided faithful followers with proof of his holy powers. But hopes that the former pope's canonisation would be fast-tracked by Sister Marie Simon-Pierre's recovery from Parkinson's disease have been set back by reports that the French nun has fallen ill again.

Maybe an analogy could do this justice.

Let's represent 17,175 yuan as a typical one story building. We could then let 1.9 million yuan represent a typical 100+ story building!

Image Source: Wikipedia

Empire State Building

As the Empire State Building was one of the last skyscrapers built before the Great Depression hit the real estate market...

That can't happen in China though. There's just no stopping miracles!


Unknown said...

I don't pretend to understand the Chinese market but I do know real estate markets can undergo paradigm shifts, like how Bay Area real estate inflated in the 70s as two-income households, economic development, and wage inflation became the norm.

Average per capita income in China is meaningless because 70% of the population doesn't have a pot to piss in.

Beijing real estate is for the winners in the system, and the winners will bid up the real estate to THEIR point of pain, not Wang Six Pack's.

90 sq meters is $270K at current exchange rates, and $500K at what the RMB should revalue to.

I don't know what interest rates look like in Beijing, but everything is in flux and I understand the desire to invest in real estate, it is historically where the smart money ends up.

Stagflationary Mark said...

Heywood Mogroot,

"Beijing real estate is for the winners in the system, and the winners will bid up the real estate to THEIR point of pain, not Wang Six Pack's."

It is Wang Six Pack who is building the units. Since real estate construction is labor intensive, Wang Six Pack's wages are therefore a large factor in the cost of the finished units.

When the selling price greatly exceeds the cost to produce, PAIN is coming. It is only a matter of time.

"90 sq meters is $270K at current exchange rates, and $500K at what the RMB should revalue to."

I am extremely skeptical to say the least.

House and Land Adelaide said...

Hmmmmmmm, The Price in real estate in increasing day by day...

dearieme said...


GawainsGhost said...

Apparently, there's just no stopping criminals either. See Denninger's article this morning.

G.H. said...

Where's the Chinese foreclosure crisis?

Even though the greater portion of the US population didn't hear about a foreclosure crisis in this country until 2007/2008, in fact, large scale ARM resets began in earnest in late 2005. Not only did folks start folding their tents in Nov/Dec 2005 but they also told their friends how resets were killing them. This in turn led to new ARM originations falling off the proverbial cliff.

All this nearly two years before mainstream America woke up to the problem.

So, where is China in the cycle? Of course we can't know because China is soooooo transparent.

But if there are any similarities between us and them then it is safe to say mortgage originations are dropping and buyers are already shunning the new debt irregardless of their high down-payments compared to ours.


watchtower said...

"It's all good!"

Until it isn't.

MaxedOutMama said...

Heywood - but average URBAN incomes are 17,175. Rural incomes are less than one third of that.

There is a price/income disparity and it is beginning to cut sales now, as increasing numbers of the young professionals/managers can't buy, even with help from their families.

Think about it. If the average urban income is 18K yuan a year, a person earning 10 times that - 180K yuan a year - would still be facing a 10 X income price. This is not sustainable. It's an inflation-fueled bubble fueled by the diversion of capital from businesses to passive investment in real estate.

Worse yet, entire families' retirement/medical savings are vanishing into the downpayments. This is going to have a hefty impact in the future.

MaxedOutMama said...

Over the last decade, housing prices in many of these cities have risen 50-90% faster than salaries of professionals.

Adding to that, the 2008 recession plus the diversion of money into real estate has produced a really bad market for younger college graduates. Quite a few of them are now working in factories, and not loving it. Check out some of the Foxconn/Honda stories.

As industrial capacity built and industrial margins fell, real estate became insanely profitable and fueled a huge bubble. A lot of these businessmen both built and bought. This is tipping over now, because even at the beginning of this year the efforts to market the housing bonds were going further and further afield and requiring higher and higher yields.

The tip of the pricing berg was built by the second-gen youngsters who got money from their families who were in business.

MaxedOutMama said...

Try this article.

MaxedOutMama said...

And I know I'm running on, but think of what this does to the banks. CRE loans, baby.

The mortgage standards have tightened, but the development loans are still there. If you let prices float to rent, a bunch of these loans will default. At which quite a few local governments will be insolvent. So banks are out hunting up cash now, and paying higher prices for it.

This is tipping over, month by month you can see it happening. May sales fell virtually across the board in China. Hugely. By more than 20%.

MaxedOutMama said...

Also, I don't know whether it's right, but the figure I have for per-capita Beijing average income is about 28K yuan a year, so a young couple would be around 60-90K a year if they had good educations and good jobs. But they are competing for housing with business owners with no investment vehicles, so they're SOL.

Stagflationary Mark said...



What do you get when you combine the export power of China with the import power of California?


Chimera (Mythology)

Thus, the chimera represents the most dangerous beast that the human imagination can conjure, taking those attributes of existing creatures to develop a new creation that is more difficult to overcome.

Stagflationary Mark said...


Chinese "Miracle"? No - Just A Scam

I snuck this miraculous post in just in time, lol.

Stagflationary Mark said...


You are in no danger of running on here. I very much enjoyed reading your commentary, and not just because I happen to agree with it either. I do though, every last bit of it.

History has shown time and time again that the "at any price" part of a "growth at any price" economic model eventually inflicts serious pain.

EconomicDisconnect said...

I am not sure what scares me more, a China on the ascension or a China in a huge bust and looking for a distraction. Good luck Taiwan!

Stagflationary Mark said...


"It's all good!"

Until it isn't.

Mmm good!

Once a day... everyday... you should have a bowl of Campbell's soup. Have some Campbell's right now.

Be good to your family!

Breakfast, lunch, and dinner! There's never too much of a good thing. ;)

Stagflationary Mark said...


All this nearly two years before mainstream America woke up to the problem.

So, where is China in the cycle? Of course we can't know because China is soooooo transparent.

You make an amazingly good point here.

G.H. said...


"...China in a huge bust and looking for a distraction..."

Singapore exports up 29.4% in April on strong demand from trading partners

"Exports to the U.S. soared 46 percent, up from a 12 percent rise in March, while shipments to China rose 30 percent and to Hong Kong 41 percent."

If China "busts" at the same time that US .gov "intervention" dries up, we won't be able to tell whether or not this image of the Port of Singapore is a live web cam or a still photo. Caution: 2.5MB image!

EconomicDisconnect said...

Macro Man had a link to a story about China increasing the minimum wage by 20%. I was going to link it but I know next to nothing about china.

Stagflationary Mark said...


I am not sure what scares me more, a China on the ascension or a China in a huge bust and looking for a distraction.

This sort of thing is normally resolved through war. Unfortunately, the world has nuclear weapons now so we'll need to resolve the unresolvable more peacefully.

I'm joking. Somewhat. Maybe.

Stagflationary Mark said...


I think I saw a toaster oven in your picture. I had to squint though, lol.

EconomicDisconnect said...

I only saw "Blog it, post it, share it!" english banner in bottom right corner on a building.

AllanF said...

I've said before that what made the Great Depression so horrible and so much worse than the current Great Recession is that in the former when banks collapsed and the balloon mortgage couldn't be rolled people's life savings were completely lost, while in the latter, FDIC has made bank failures little more than voyeuristic fodder for blogs and relatively few people had any equity in their foreclosed houses anyway.

Looking at China's real estate market, when it goes south, it is going to resemble the Great Depression as most people's life savings are going to be wiped out.

Carrying the Great Depression comparisons further, (and Mark has commented to this as well) their idle plant capacity is going to very much resemble the US in the 30's. The 30's were a great time to be an American provided you cashed out in '28 or '29. I can't help but wonder if the 2010's will be a great time to be a Chinese provided you RMBed out in '08 or '09.

Stagflationary Mark said...


Yeah! What you said!

The jobs report came in weaker than expected. Cashing out in 2009 here in the USA isn't looking so bad in hindsight either, or at the very least... yesterday, lol.

I think it is safe to say that the S&P's Rubicon (1200 level) will be safe from attack today. The futures suggest the troops are attemting a structural withdrawal. Um, I mean strategic. Some might even argue its a tactical withdrawal but let's face it... morale stinks!

Stagflationary Mark said...

I seem to be missing a "p" in attempting. People tend to lose "p" when they panic but I can't use that excuse. I pre-panicked. I ran at the first sign of smoke and/or mirrors.