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Reuters: Hainan Property Bubble

May 8, 2010

There was a good article this week issued by Reuters, and authored by Langi Chiang and David Stanway, on yet another part of China where a booming real estate market is raising serious concerns.  Hainan is a tropical island off the country’s southern coast, part of the region I call China’s Back Door, which is being developed as a “fun in the sun” tourist destination.  The island has already seen one real estate boom and bust in the early 1990s, and is now a focal point for property speculators all across China. 

The reason I mention the article is because it highlights some of the key features of China’s real estate “riddle” that I’ve been noting again and again.  First, there is the phenomenon of sold but empty apartments:

Walking along a deserted street in Haikou recently, a prospective buyer, Cao Ying, could hardly believe what had just heard:  All the apartments in the surrounding blocks were sold out, even though no one seemed to to live there.  Perhaps two apartments in ten were actually occupied, local property agents said.  New apartments are to go on the market this month, but they are to be priced at about 15,000 renminbi, or $2,200, per square meter, triple the level of a year ago.  That is about $200 per square foot.  “That’s outrageous,” Ms. Cao said after getting similar information from three real estate agents, all indifferent to her protests.

Second, the prevalence of cash purchases, the immunity of this source of demand to new government restrictions on mortgage lending:

A survey by CLSA of 60 cities in late March and early April showed that about half of families in second- and third-tier cities had paid for their first or second homes entirely in cash.  The proportion was even higher in Haikou.  Guo Zhenxi, a local real estate agent, said all his clients paid the full amount in cash, making it easier when they wanted to sell.  Cash buyers, or those not borrowing much, will return to the market if prices fall because the new rules do not raise the cost of holding property, once it has been purchased, analysts said.

A New York Times article on Hainan back in late March described the same thing in somewhat more vivid terms:

“People are coming with entire bags full of cash,” said Raymond Hau, general manager of the Sun Valley Golf Resort, which is building the 220 luxury villas. “I’ve seen this myself. A man had a bag and unzipped it. Boom. ‘Here’s the deposit,’ he said. ‘I want two apartments.’”

Third, the Reuters article points out investors’ ironclad belief — despite all the official pronouncements designed to cool the market — that in the end, the Chinese government will prop up property investments: 

Ren Zhiqiang, chairman of Huayuan Property . . . said Beijing would turn supportive if the market overreacted.  “If property prices drop to the desired level or farther than expected — if there’s a panic fall — the authorities will change policies,” Mr. Ren said in a blog post.

Last but not least, the article reinforces the point I’ve made previously, that was is happening here is not limited to magnet markets like Beijing and Shanghai, as some suggest, but is a much broader phenomenon driven by distortions in China’s economy as a whole.

11 Comments leave one →
  1. May 8, 2010 11:51 pm

    If it is all cash and not so much credit, why/when would the bubble burst!

    • prchovanec permalink*
      May 9, 2010 12:01 am

      As I’ve noted before, leverage can fuel a bubble, and can make its consequences more severe, but it is not a necessary condition for a bubble forming and bursting. I cited the Tulip Craze, the South Sea Bubble, and the Dot-Com Bubble as historical examples of bubbles that were not primarily leverage-driven. They popped when people came to realize that the prices they were paying were way out of line with the actual likely return on the assets involved, in terms of future cash flows.

      As I’ve also noted, there is leverage in China’s property market (particularly in the commercial as opposed to the residential sector), and significant banking exposure to property risk, even though it looks different than in the West. No two bubbles look alike, although we expect them to — one of the main reasons we don’t see bubbles coming.

  2. Terry permalink
    May 9, 2010 12:23 am

    I can’t help but think that much of the cash is coming from illegal means (kickbacks, bribes or other forms of corruption) and in a sense dumping that into property is a way of stashing these funds away into something that is perceived as safe in the long run (or a bolt hole to retire too when things start going bad).

    I have been running into and encountering that very same faith in the government not going to allow things to crash to far. It is a recurring theme as well with stock market investments. A tremendous faith in the paternalistic state, or is it in the self-interested nature of those who are in positions of power and are deeply invested in property.

    You might find this article very interesting if you haven’t come across it already:

    China’s ‘Too Big To Fail’ Is Best Understood As ‘Endless Moral Hazard’

    Read more:

  3. May 9, 2010 7:16 am

    I live in Haikou. Not only are things the way you said here, it is even worse. Most property buyers are mainlanders looking for an investment or a vacation property. Locals who have been saving for their whole lives are finding themselves unable to purchase a home at all, and are driven to rent. The rental market prices are also spiraling upward, driven by landlords desperate to recoup part of their investment money. It’s getting ugly.

  4. Terry permalink
    May 9, 2010 10:56 am

    I just got a sales call on my mobile in Beijing telling me about great property deals in Haikou!!

  5. dth permalink
    May 9, 2010 12:26 pm

    Hainan has been in the news a lot. Apparently they’ve been building a ton of golf courses there and also a submarine port (!). Some of the links are in here:

  6. brad greenspan permalink
    May 9, 2010 10:00 pm

    the reason why chinese pple believe that the govt will prop up the ppty mkt is because this has happened before.

    1) in 2008 china imposed tightening measures on the ppty mk
    2)ppty prices in first-tier cities proceed to fall 20-30% up till March 2009. Ppty development companies started to faced a credit crunch due to US subprime crisis.
    3) from May 2009 to Aug 2009, china release a slew of policy measures to prop up the ppty mkt, such as cutting stamp duties, lowering downpayment levels on first ppty and other measures to encourage home ownership.

    Hence, if you talk to any chinese pple, they are quite blase abt the current tightening measures. After all, they just experienced it not 2 years ago.

    In fact, the current conventional wisdom is that a 20-30% fall in prices would make great buying opportunities. After all, the chinese govt can’t let the ppty mkt crashed — it’d stir up social unrest.

  7. Jamwal permalink
    May 10, 2010 1:57 pm

    Is there any way to get data on the total number of residential units built in China every year and for the past 10 years or so? What is the total stock of Chinese residential units, I wonder. May help to understand consumption dynamics of cement and steel etc., going forward.

    Thank you for excellent and insightful commentary on China on your blog – I find it a ‘must read’.

  8. greg permalink
    May 13, 2010 6:36 am

    I have commented in this blog before that a lot of foreigners and foreign reporters love to use Ordos of Inner Mongolia as the favored examples of China’s property bubble, just like Ai Weiwei has been often quoted as a sort of “freedom” or “democracy” fighter to indicate all things that are wrong with China. And as an anecdote , I mentioned that Ai Weiwei had been instrumental in the building of Ordos’s “empty city.”

    Interestingly enough, Wall Street Journal’s China Realtime Report had a recent report on Ordos, which talks about Bank of America-Merrill Lynch economist Ting Lu decided to pay a visit to Ordos to see for himself, and detailed the result in a fascinating report. The URL for the WSJ report:

    What Mr. Lu found out is quite different from these foreigners or foreign reporters characterize Ordos to be. In a nutshell, what the local government in Ordos has done in building the so-called “empty city” made more sense and has managed the resources richness reasonably well.

    In the end, Mr. Lu has this to say:

    “We found a brand new but empty city, but reporters could easily distort the overall picture, exaggerate problems, and overly generalize findings. In fact, Ordos is very unique – and it is quite misleading to assume what happens in Ordos could happen in other parts of China,”

    That Ordos is quite unique in China due to their resources rich is not something new to people who are familiar with China. It is usually people who has some pre-conceived notions about China or people who have already formed a certain conclusion about China and want to find some “vivid examples” to back them up that so easily pick up Ordos as something representative of China.

    For the same reason, Hainan Island is anything but typical of China, and the property market on Hainan Island is anything but representative of China.

    Does China has an overheating property market? Yes, it does most definitely. That’s why the government is now taking harsh measures to cool down the market. But it’s mistaken to think all cities in China are like Beijing, Shanghai, Hainan or indeed, Ordos.

    • prchovanec permalink*
      May 13, 2010 8:37 am

      I found Ting Lu’s piece extremely well done, but don’t agree with some of her conclusions. I’ll be posting something on this topic later today.


  1. Insight on Ordos « Patrick Chovanec

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