Tuesday, August 21, 2012
Are Property in Singapore, Hongkong and China heading for Bust?
Are Developers Colluding to Push Up Prices, Rendering Control Measures Futile? What are the underlying causes for persistent and rapid price rises in Singapore, Hongkong and China’s property market and what are the possible causes that could lead to a reverse course.
What have caused China’s property prices to rise incessantly? Apart from the demand factor, there are four other factors that have caused dogged upward movement in prices:
Let's study China market in relation to Singapore and Hongkong
Let me illustrade :
In 1980 say there were 400,000 household of average 6 children per household.Population then will be around 2.4 million Let assume 1 out of 6 remains single and the other 5 got married with average 2 children, that work out to 2.5x400,000 = 1 million new household with 2 million childrens. These childrens are now in the age group of 10s to 30s. Say 50% are married or going to get married. We will have 500,000 new household entering property market. The demands for flats will be a whopping 1 million over the last 10 to the next 10 years. is apart from foreigh buyers, new citizens and PRs. Even our government were caught off guard with this exploding demands
(2) Economic power - The chinese are moving up the economic ladder due to huge investments that have flowed into China over the last few years. Businesses are flourishing, so are workers' salary that have moved up by 50% or more. This has fuel the demands from mid to luxury end market.
(3) Manipulation and collusion - Property price rises bring extra profit to developers. No doubt developers are the major pushing force behind the housing market. Most developers’ gearing ratio is 75 percent. That means only one-quarter of the total investment fund is the developer’s equity, while the remaining three-quarters are borrowed funds. For every price rise of 1 percent, the developer’s return on equity will grow 3 percent.
Another point is that in a rising market, even when a project is completed, a developer can choose not to sell out the completed units all at once if they expect future price appreciation will be greater than their carrying cost. They will simply hold on to the units, thereby squeezing the available supply, to maximize their return.
There are a number of prodigious developer groups who are known to manipulate the property market by collusion, enabled by their dominating market shares. Unless something can be done to restrict their market shares, none of the cooling measures such as raising interest rates and other administrative controls like regulating land grant procedures is going to be effective. As long as they can exercise dominance in the market, they can easily pass on to consumers any additional costs like interest rate cost and land cost.
(4) Grafts and Corruption - Local government officials are prone to take a rising property market as a sign of economic prosperity. Besides, it also brings them higher tax revenue and other grey area income. So they would only be happy to see an upwardly mobile property market. We have seen in the news how large developers receive favors from government officials to win lands.
So what would cause the property market to reverse gear :
(1) If some drastic negative economic fundamentals surface, like an abrupt rise in long-term real interest rates or dramatic changes in the tax system, these could cause the property market to tank. However, given the serious lag in reforming China’s tax system, all the various taxes that have been introduced as cooling measures are in fact useless as such.
(2) Relaxing land supply may apply some pressure on prices in the short term. In big cities like Beijing and Shanghai, the increase in land supply in 2006 was seen as an effective coolant. However, in the coastal cities where land is becoming very scarce, this measure is simply not workable.
(3) Experience shows that short-term restrictive measures like tightening monetary supply, directly taxing speculators and some price rise capping measures can have a cooling effect. However, such measures cannot be effective over the long term, as these would be off set by people’s natural expectations of price appreciation.
To make a final judgment on the causes of property price rises and falls would be crucial to improving and regulating China’s property market and preventing a financial crisis. The most urgent thing to do now is to establish a high quality research institution to collect and analyse all relevant data.
Generally speaking, it appears that all the property price huge rise causes are due to low interest rate, huge money flow and high economic growth. However despite all cooling measures prices are resilient except for China 2nd & 3rd tier cities where prices have crashed up to 30%. Based on this observation, we can conclude that property prices will be flat or with 10-20% downward bias in the next 10 years.
Let's study China market in relation to Singapore and Hongkong
Singapore
The property market has exploded partly due to the babyboomers' offsprings entering the market and partly due to sudden influx of foreigners, PRs etc. The massive liquidity from printing of money that cause value of money to go down, inflation to shoot up, interest rate to hit rock bottom, and thus asset class becomes a valuable solution. The casinoes is another compelling factor for foreigners to speculate on our market.Let me illustrade :
In 1980 say there were 400,000 household of average 6 children per household.Population then will be around 2.4 million Let assume 1 out of 6 remains single and the other 5 got married with average 2 children, that work out to 2.5x400,000 = 1 million new household with 2 million childrens. These childrens are now in the age group of 10s to 30s. Say 50% are married or going to get married. We will have 500,000 new household entering property market. The demands for flats will be a whopping 1 million over the last 10 to the next 10 years. is apart from foreigh buyers, new citizens and PRs. Even our government were caught off guard with this exploding demands
China
(1) Demands - China is different from Singapore as they have one child policy in the last 30 years But China has one billion population. Say there are 4 persons per household, that gives us 250million household or 250 million childrens in their 10s to 40s. The demands for flats will be a whopping 125millions over the last 10 to the next 10 years.(2) Economic power - The chinese are moving up the economic ladder due to huge investments that have flowed into China over the last few years. Businesses are flourishing, so are workers' salary that have moved up by 50% or more. This has fuel the demands from mid to luxury end market.
(3) Manipulation and collusion - Property price rises bring extra profit to developers. No doubt developers are the major pushing force behind the housing market. Most developers’ gearing ratio is 75 percent. That means only one-quarter of the total investment fund is the developer’s equity, while the remaining three-quarters are borrowed funds. For every price rise of 1 percent, the developer’s return on equity will grow 3 percent.
Another point is that in a rising market, even when a project is completed, a developer can choose not to sell out the completed units all at once if they expect future price appreciation will be greater than their carrying cost. They will simply hold on to the units, thereby squeezing the available supply, to maximize their return.
There are a number of prodigious developer groups who are known to manipulate the property market by collusion, enabled by their dominating market shares. Unless something can be done to restrict their market shares, none of the cooling measures such as raising interest rates and other administrative controls like regulating land grant procedures is going to be effective. As long as they can exercise dominance in the market, they can easily pass on to consumers any additional costs like interest rate cost and land cost.
(4) Grafts and Corruption - Local government officials are prone to take a rising property market as a sign of economic prosperity. Besides, it also brings them higher tax revenue and other grey area income. So they would only be happy to see an upwardly mobile property market. We have seen in the news how large developers receive favors from government officials to win lands.
So what would cause the property market to reverse gear :
(1) If some drastic negative economic fundamentals surface, like an abrupt rise in long-term real interest rates or dramatic changes in the tax system, these could cause the property market to tank. However, given the serious lag in reforming China’s tax system, all the various taxes that have been introduced as cooling measures are in fact useless as such.
(2) Relaxing land supply may apply some pressure on prices in the short term. In big cities like Beijing and Shanghai, the increase in land supply in 2006 was seen as an effective coolant. However, in the coastal cities where land is becoming very scarce, this measure is simply not workable.
(3) Experience shows that short-term restrictive measures like tightening monetary supply, directly taxing speculators and some price rise capping measures can have a cooling effect. However, such measures cannot be effective over the long term, as these would be off set by people’s natural expectations of price appreciation.
To make a final judgment on the causes of property price rises and falls would be crucial to improving and regulating China’s property market and preventing a financial crisis. The most urgent thing to do now is to establish a high quality research institution to collect and analyse all relevant data.
Generally speaking, it appears that all the property price huge rise causes are due to low interest rate, huge money flow and high economic growth. However despite all cooling measures prices are resilient except for China 2nd & 3rd tier cities where prices have crashed up to 30%. Based on this observation, we can conclude that property prices will be flat or with 10-20% downward bias in the next 10 years.
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