2012-05-15

Lang Xianping warns: China repeating Hong Kong's mistakes; affordable housing bubble will destroy real estate and trigger Hong Kong-style recession

Governments are slow to act and almost always close the barn door well after the horses are gone. There's unrest from the public over high home prices, but the government let the bubble rip after 2008 to keep the economy humming. Now, slowly developing plans for affordable housing are hitting the market just as it turns over. Lang Xianping sees disaster and its hard to disagree, although he does neglect to mention the Asian Crisis. That said, governments do often end up acting pro-cyclically (boosting the economy when it is already booming, slowing it when it is already in recession), thus affordable housing policy may simply be a good sell signal. Below is my rough translation of his article:

Real estate market is a half step from collapse; government housing is the biggest bubble

We are a only a half-step away from a Hong Kong style recession, because of the three mistakes made by Hong Kong, we have already made two-and-a-half.

First, the government monopoly on land development rights, intentional creation of a property market volcano, public finances critically reliant on land, makes real estate into an economic pillar.

Property rights were always government owned and leases were the main source of government income. The higher the property prices, the bigger the government revenue. People today realize, the pre-handover British run Hong Kong government stoked the property bubble for short-sighted gains, just as these past few years local governments have been falling all over themselves to pillage land profits.

For a long time, real estate was the champion of the economy, the financial services sector also relied on real estate. Relied to what degree? I break it into three levels:

The first level: economic dependence. In 1997, real estate and related value added industries accounted for 40% of GDP, the whole economy revolved around the sector. Long-term real estate investment accounted for two-thirds of fixed asset investment.

The second level: public finance dependence. Government revenues depended on long-term leases and other real estate taxes.

The third level: financial dependence. Real estate shares were always the biggest stocks, accounting for one-third of market capitalization. Real estate shares and property prices pulled each other and shared fortune or disaster. Real estate and banking were also mutually dependent, developers and residential mortgages always accounted for at least 30% of total bank loans.

Now let's contrast that with China's economic data:

The first level: economic dependence: In 2010, real estate investment accounted for 46.6% of fixed asset investment.

The second level: public finance dependence: In 2010, property transfers hit a new high; the growth rate hit a new high, increasing 70.4%. Land transfer payments accounted for 76.6% of local government revenue, a new high, and this unprecedented scale reflects the local government finances' extreme dependence on real estate.

The third level: financial dependence. Real estate loans account for 20% of total loans, reaching 9 trillion yuan total; add in related real estate loans, mortgages and other credit, and it reaches nearly half of loans, about 20 trillion yuan. If we add in credit outside of the system, such as trust loans, real estate may account for as much as 60% of total credit.

Second, ignore negative interest rates, encourage capital into the false property, stock and manufacturing boom.

At the beginning of the 1990s, Hong Kong had negative real interest rates. Bank deposits were below 10% inflation rates, forcing people to look for investment opportunities to avoid seeing their savings consumed by inflation. However, the British run Hong Kong government adopted a laissez-faire attitude. From 1992-1994, "mansion" prices ferociously rose 600%, top rate office buildings rose 250%, Sha Tin and other non-downtown, mid-range properties gained 300%. The government issued many restrictions on property speculation, but all it did was cause a slight pullback.

However, the British Hong Kong government's "last governor" Chris Patten was consumed by politics and ignored the negative interest rate problem. This caused the boom in the high-end properties to spread to middle and low income housing. In the first part of 1997, the property market threw off two years of losses and rallied to new highs in the autumn. From the day of the handover on July 1, 1997, property prices rose another 80%, and a 40 square meter apartment cost two to three million Hong Kong dollars.

Where are we today? Also ignoring negative interest rates and the plight of ordinary people. Property taxes are good, buying restrictions are fine, but this doesn't do anything to resolve the problem of ordinary people looking for an inflation hedge. The most serious inflation issue is the difference between deposit and loan rates. One year deposits pay 3.5%, loan rates are 6.56%, the official inflation rate is 7.9% (all data is as of the time of writing). What does this mean? It means your deposits lose money, your loans lose money, but no bank loses money. Of course, the inflation rate is nowhere near that low, and don't think you can earn money by borrowing, because if you're borrowing for anything other than a home, the floating rate is 40%, which is to say, you may not even be able to borrow at 70-80% interest. Everybody know current Wenzhou interest rates? According to national news, monthly rates exceed 10%, which means annual rates exceed 120%. Only mortgages are relatively low, lower than the real interest rate, so this policy is in fact forcing you to buy a home to hedge against inflation.

Third, the recession is before your eyes, but for political gain, the housing market is suppressed.

On October 8, 1997, Hong Kong Chief Executive Tung Chee-hwa released a policy report called "Building Hong Kong for a New Era," later called the 85,000 homes policy. It had three goals: every year construct at least 85,000 public and private homes; within 10 years 70% of Hong Kong residents would own their home; reduce the wait for public housing to three years. At the time Tung Chee-hwa announced the policy, annual new private home supply was only 20,000, supposing the policy was implemented, public and private housing would be four times supply, it'd be a wonder if the market didn't crash.

What's worrying is that we are very close to Hong Kong's absurd "85,000"!

In 2011, through new construction, renovation, purchases, long-term leases and other methods, Beijing plans to create 200,000 units of affordable housing, provide 20,000 homes with rental support and complete 100,000 units of affordable housing. At the same time, Beijing started applications for public rental housing, audits, etc., and more than 10,000 homes were approved before the end of 2011. But is everyone aware of the 200,000 units idea? In each of the past five years, Beijing has increased housing supply by about 100,000 units. So Hong Kong used a 4:1 double punch to kill the property market, if Beijing implements the plan, it will use a 2:1 double punch!

What about Shanghai? In the latest 5-year plan, Shanghai plans to build 130 million square meters of housing, 60% of it affordable housing. In other words, Shanghai is planning a 1.5:1 double punch.

Furthermore, I want everyone to pay attention to the above 1.5:1 and 2:1 numbers, I think they are wrong, because the central and local governments keep revising their plans, the current version calls for 36 million affordable homes, including 10 million that began construction in 2010. What's the idea? In 2010, the completed residential housing was 612 million square meters, non-residential real estate was 222 million square meters, for 834 million square meters total. If the 10 million affordable homes that started construction in 2010 have an average area of 75 square meters, that would mean 750 million square meters total. For 36 million total units, that's 2.7 billion square meters. In other words, it's really a 3.5:1 strength crack down on the real estate market. And you should know, the Hong Kong real estate market didn't collapse when the affordable housing was completed, rather it collapsed not even several years after construction began.

In the past, high home prices were the biggest bubble in the Chinese economy, now affordable housing is the biggest bubble. What I want to say is, this is the real estate market's life or death moment, move forward another half step and there's a bottomless abyss, I hope we don't repeat Hong Kong's fatal mistake!

Source: 郎咸平:楼市距崩盘只差半步 保障房是最大泡沫


Lang Xingping made news in late 2011 when a recording of a private lecture went public (and viral in China). Here's a news story with English subtitles from last year, when Lang made headlines with his "China is in a depression" speech.

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