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Musings Report #9 2-27-16 Will China Pop the Global Real Estate Bubble?
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For those who are new to the Musings reports: they are basically a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Welcome to February's MUS (Margins of the Unfiltered Swamp)
The last Musings of the month is a free-form exploration of the reaches of the wild swamp that is the source of the blog, Musings and my books.
Will China Pop the Global Real Estate Bubble?
Anyone who follows the global real estate bubble knows these two article are intimately related:
Here Comes The Red Swan And Other Reasons To Be Very Afraid
Australia’s Housing Bubble: In the Grip of Insanity
As China's newly wealthy class of entrepreneurs (and the Party officials they paid handsomely for a seat at the table) grasp the inevitability of a massive devaluation in the yuan/RMB, they have been moving their capital/cash into Western real estate, with special emphasis on the eastern coast of Australia, B.C., Canada, high-demand urban zones in the U.S. (L.A., San Francisco, Miami, NYC, etc. ) and chateaux in France.
This flood of capital has overwhelmed these markets, pushing prices into the stratosphere as up to 40% of all buyers originate in China.
The flood is gaining momentum because the Chinese understand this wealth is phantom in China (unless you are in the tippy-top circle of political power), exposed to a crash in China's housing bubble, a collapse in the value of export businesses, and/or expropriation by a desperate central state.
There are two other factors supporting this flood of capital out of China into desirable locales in the West:
1. The people fleeing with millions are part of the new elite in China, and the government agencies tasked with limiting capital outflows would be impoverishing their own class were they to seriously limit outflows. Indeed, everyone in official circles wants the escape route left open until they've made their escape.
2. As Oz-based correspondent Bart D. explains, the regions benefiting from these housing bubbles have now placed their economic future on the bubble continuing in perpetuity.
I sent the "In ther grip of insanity" article to Bart and asked for an on-the-ground feedback:
“The property bubble is everything to this economy and the country’s citizens, whether they know it or not, are ‘all in’.”
BART: Damn Right! It’s the only thing still happening in the economy that doesn’t involve selling food.
"My neighbor confirmed that, in many cases, the apartments are not being marketed locally at all but to investors in other States and through dedicated Chinese agents.”
BART: Think about this. Sound familiar? The Chinese have ‘outsourced’ building Ghost cities to Oz. They got our manufacturing industry … we got their ghost city industry.
“the end is clearly getting close”
BART: Housing here is ridiculous in key locations such as the east coast. But … refer to the first item above!
Expect the defence of the housing market to be a bitter ‘to the last man – last round’ type affair. Governments and banks here and in China are furiously constructing a fortress of fear that will take a huge toll on any attackers. At this point I can’t even tell if someone like me will be a casualty of attack or defence as I own my home outright but want to hold cash until I can buy an investment place for my kids at a ‘sustainable’ price.
Thank you, Bart, for the commentary.
I am afraid that virtually every "hot" locale being supported by Chinese buyers is expecting the flood of transaction fees, property taxes, etc. to last forever.
And if housing has been selected as the foundation of household wealth, then the bubble popping would have catastrophic consequences for household wealth. Once the unprecedented tide of capital and buyers out of China recedes, there is no equivalent source of capital or buyers to keep the bubble inflated.
I see two possibilities: one is that the Chinese authorities are forced to limit the outflow of capital in order to maintain control of the nation and its economy. This criticality may not come to pass, but any widespread social disorder and blowback from the wealthy fleeing may force authorities to throttle the outflow, up to and including semi-random executions of small-fry who try to evade the capital controls.
The second possibility is all the mobile capital has already fled China; to raise more cash would require selling assets in China for which there is no market.
Becoming dependent on phantom wealth and assets bubbles is not a sustainable system. The only question is what form collapse will take and what the proximate trigger will be.
Right now, we're assured China's debt/housing bubble will never pop because the state won't allow it. But the state/central bank has allowed credit to expand to levels that no agency can control without collapsing the private-sector trade in debt, credit, risk, services and goods.
Stay tuned. China may manage to stretch out its credit/debt bubble decline, and there may another few trillion in cash that's on its way to Sydney, Vancouver, L.A., etc.
Patience will be required; perhaps the real crisis is still 5 years away.
From Left Field
The Unreal, Eerie Emptiness of China’s ‘Ghost Cities’
Reinventing the Greenhouse (via Joel M.)
Texas Isn't Scared of $30 Oil
Houston’s posh parts no longer a barrel of laughs
The Drivers Of Inflation: Rent, Obamacare And Minimum Wage Hikes
The world's smallest language has only 100 words — and you can say almost anything
HILLARY CLINTON VS. DONALD TRUMP — A TOUGH BATTLE
The ocean is broken -- important first-hand account of a sailboat's voyage across a mostly dead Pacific...
THE ORIGINS OF CHEAP NATURE: FROM USE-VALUE TO ABSTRACT SOCIAL NATURE -- weighty, jargon-heavy, but some good points...
Trump's victories aren't mysterious if you understand why people are angry
The Game Changed in Venezuela Last Night – and the International Media Is Asleep At the Switch
You are the robots: The banking industry puts an appealing spin on a future of contactless payments, branchless banking and cashless society. But it diverts your attention from the dark side of automated financial regimes, says Brett Scott
"Grief has limits, whereas apprehension has none. For we grieve only for what we know has happened, but we fear all that possibly may happen." Pliny the Elder
Thanks for reading--
charles |
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