China Syndrome

Very interesting article about the potential risks in Sydney and Melbourne markets...be very vary about some of the Asian focused markets in these cities.....it is question of when not if....

Australians are ignoring a crisis that's bigger than Brexit: Chinese debt

 

China has more millionaires than Australia has people. The other thing with China is that they have a Government controlled economy that can manipulate their fiscal and monetary policy in their favour. China has weakened, but their GDP is still ticking along at 6+%, which is impressive in this current low growth climate.

 

Maybe...but they are also chewing through their reserves.......China ,may have a lot of millionaires but there is no transparency in their economy. Should the real situation come as a show it will be very dire.

The snowball result could be that people may panic and pull out investments from Australia.

I can see some parallels with Japan........unfortunately...China is not fully developed..but they have a rapidly ageing population to contend with.

A 6-7% growth rate is the minimum growth rate required to contain growing unemployment...will be interesting if it slows to 3-4% like Australia....that would make things get interesting.

 

Recently, I spoke with some Chinese Nationals who have lived here for a long while. They still couldn't figure out how people in Shanghai who did not own lands became so insanely rich.

 

This article doesn't mention the Chinese buyers but we know... Apartment prices to fall up to 15pc, economist warns

 

Lots of dodgy stuff....the Chinese govt is now waking up to the fact that there is a lot of money leaving the country...a lot of which money has been made on the black market and no taxes paid.

The fact they are cracking down on this indicates....that there is rhyme to reason...their reserves are running short. They are proactively containing outflows..

In certain parts of Sydney....Chinese buys account for up to 50% of purchases...some of these suburbs like Eastwood, Epping, Chatswood, Epping, Burwood...part of Ryde/North Ryde are likely to feel the pain the most.

Parts of the West have corrected.....

The real fun will begin the when rates eventually go up...though I believe this could be a couple of years a away...but other shocks can unsettle the Sydney market.

 

I'd always thought that the chinese buyers distort our usual standard analysis about income / rates affecting property prices because I assume the large majority of them have so much cash that (1) they are not dependent on Australian wage numbers / growth and (2) they pay cash and are therefore not affected by interest rates.

It would be great to know the stats on the proportion of Chinese (whether resident or non resident) buyers that are buying with cash vs debt.

Another speculative assumption is that they don't sell, and aren't fussed about yield since again (1) they have plenty of cash and (2) it doesn't matter if prices fall because they can afford to hold and they don't sell. Query also whether one of their goals is to shift wealth from a jurisdiction of uncertainty to a jurisdiction where (assuming they comply with local law), their assets can never be taken away from them by political means.

All of the above is not based on any facts but their buying behaviour in the last few years seem to lend themselves to the above assumptions. Again, would love to know if there are any stats that can support or dispel this.

 

Don't have stats. but move in circles who know about this..but most Chinois buyers do use finance.....only a select few buy cash. A lot have PR in OZ and bought whilst having jobs in China...this window has largely closed. A lot of fraudulent loans in this area...banks looked the other way for a while...now they are worried.

Most are like lemmings...they follow other Chinese...I suspect they will also follow then out when the market tanks...will be proven shortly. Already my broker has told me a few stories about some Chinese buyers walking away from deposits after non getting finance. He shakes his head as some don't understand the legal ramifications in Australia.

 

what would happen to these Chinese buyers who walk away from deposits ? And these Chinese has are not PR or citizens of Australia, and then have no intention of setting foot ever again in Australia. Can the banks go after them in China ?

 

Good question........don't know.....

 

Most likely, keep the deposits and resell the apartments. It'll be too expensive an exercise to bring claim against them in China...even if successful, it would cost them money to enforce any judgment. They (developers) are in the business of making money and probably wouldn't waste time in pursuing defaulters.

 

Yeah you are probably right....but I was thinking of a scenario in the 90s where lot of people walked away from a particular development ....unfortunately...this made the banks nervous and they foreclosed and called in receivers..when this happens .....it gets really messy....

 

These are usually the overseas buyers who buys OTP, or local buyers who only have overseas income. After the lending policy tightened a few months ago, overseas income alone can no longer use for borrowing, hence these buyers were forced to forfeit their deposit.
The only other option they have is to buy with cash, but that's another issue because China has tightened money leaving the country.
Basically they are stuck.
I don't think banks can go after them since they have never obtained a loan.

 

Possible.

 

Correct....no recourse on the buyer from the bank...but the developer can go after them also. Though as Larry says would keep the 10% deposit and try to sell the unit for a discounted price...though some hate doing this as a lot will keep 10-20% as their own to sell after the development completes.

As I have alluded to previously....typically a lot of developers would have got finance on the premise that they had 60-70% in persales.....issue is if significant amount of presales fall over the banks may call in receivers..then it can get interesting.....

 

Agree that banks won't go after buyers since no loan has yet been provided to them.

I've not looked at these OTP contracts before but isn't the whole concept with deposits is that if you don't settle/complete, developer keeps the deposit and there is no further recourse - so no further liability on the borrowers? I think with overseas buyers the deposits may have been 20% rather than 10%.

 

A lot of the OTP contracts also state the developer can also come after you legally for breach of contract.

In most instances nothing will happen but in a bad market who knows? Also if the developer becomes bankrupt watchout if the receiver enforces the contract....

 

There you go, learn something new. Although I think if I were the developer or the receiver I probably wouldn't bother on the basis that:
(1) developer has to mitigate any loss, so they won't be able to sue for full amount - probably only the contract price minus (market value plus deposit) at most.
(2) good luck finding the Chinese buyers in China
(3) the sheer cost of pursuing in China would not make it worthwhile.

You'd think that the banks funding the development would in most cases be covered by the security over the property so it's hard to see receivers chasing them in China for such little gain.

Ah - now I see why there's still such a huge demand for OTP in Sydney from Chinese buyers! A 10%-20% bet for a potential huge upside if on completion the value has skyrocketed!

 

@sash this is the state of economy in China

Debt-To-Equity Can't Be The Only Way to Deal With Corporate Debt
"Take the steel industry, for example. According to the National Bureau of Statistics, the debts of all steel makers in China added up to 4.37 trillion yuan ($648 billion) at the end of last year. Their combined net profit before deducting interest payments last year was about 166.7 billion yuan. If all of the profits were used to service debt, which carry on average an annual interest rate of 6.2%, the companies could borrow at most 2.69 trillion yuan. The difference between 4.37 trillion and 2.69 trillion yuan, which is 1.68 trillion yuan, is the amount of loans that must be resolved because the companies cannot afford them.

Using the same method, it could be calculated that a total of 2.18 trillion yuan worth of outstanding loans must be resolved for the coal and coke industries, both of which have been required by the government to trim excess capacity like the steel industry.

Altogether, it means the three industries alone have borrowed 3.86 trillion yuan more than they could afford.

Deleveraging means getting rid of these excess debts, but it is impossible for banks or any other financial institutions to support the conversion of such a huge amount of debt into equity capital."

@2FAST4U :
China's current 6.7% GDP growth figure is nothing impressive given that it is fueled by credit and stimulus from the gov. But most of all the GDP figures are fudged, there is no corresponding growth in their energy/electricity usage which usually tracks economic growth.

As you can see for coking and coal industry, Beijing actually had to force working days in this industry to be cut to 276days. And suddenly coal is back again



For the past year property prices have bubbled again in major chinese cities so no surprise of trickle effect to Sydney/Melbourne.

 

KB...most people do not have awareness or knowledge let alone sophistication of what you have said below.

You assessment is spot...China has a central govt. with no control so they can do what they want. You can only hide things for so long...the cracks will show up somewhere.

When it does...it will not be pleasant. Unfortunately...a lot of people in China will get burnt. When they do...they will start to repatriate foreign assets back to China to pay for debt levels there as assets there plunge. Thus some level of impact particularly in the Sydney and Melbourne markets.

Warning signs was how tough a stance Beijing has taken on people who flout the US $50k limits of taking money out if China. They are jailing people to make examples and discourage others....this does not bode well.

Just recently I could not believe a chaotic country like India is growing at 8% plus...they were down to an anaemic 3.5% before. At 6.7% growth unemployment will rise rapidly...that is not going to bode well for the govt when the natives get restless...watch this space.