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The China Real Estate Bubble. Will it Affect You?

Help - Owner financing for SELLERS
The China Real Estate Bubble continues to develop, and it could affect what you are doing. (1) Prices continue to be on a “tear,” especially on the Coast and in the big cities, but at a slightly slower pace. (2) The Government cannot do as much to cool the market as can be done in Western Societies because the Buyer relies less on Financing. Tightening interest rates and raising down payment requirements has had limited impact. The Chinese still make a lot of “Cash” Purchases (3) The demand for Real Estate in China is so strong that it has had a “negative” impact on the price of Gold, a typical haven for investment and rainy day money in Asian Societies such as China. The actual amount of gold purchased in China in 2009 and 2010 decreased over the prior years as the extra money was funneled into “Real Estate.” (4) Another, often overlooked, factor in the Chinese Real Estate market is a cultural one. If you are a single guy and you want a wife (and there are noticeably fewer women between 19 and 35 in China than men as a result of the one child policy) then you better have an apartment. Trying talking the parents of a beautiful Traditional Chinese Women into accepting you as a son in law, if you don’t have an apartment. I have a Chinese friend here with a MBA. He is aware of the phenomenal cap rate on real estate here, but he is in love, so he has to make an economic decision he knows is wrong in order to be with the woman he loves. (5) There are other issues here” a. Increasing the Interest Rate puts upward pressure on the Yuan which other countries want. But, China wants to keep the Yuan “undervalued” in the near term to protect domestic exporters which they see as more important than the cooling of the Real Estate market. b. China continues to “monetize” its foreign exchange earnings and this adds to inflationary pressure which fuels further interest in Real Estate. c. This inflationary Pressure will soon negatively impact more than just the Housing market, and China knows that. (6) China has implemented a new tool that is starting to impact the market somewhat. The Government now restricts the financing for second and third homes (Hard to believe that there are second and third home purchasers in China, but there are. And, of course, the purchase of the second and third home is not for enjoyment, but for investment). (7) The next issue is “What is the actual match up of housing units and family formations?” I am not sure that anyone has actually calculated how many housing units are needed and how many are available and “on their way to the market.” There are now reports that many of the units that have been purchased have no one “living” in them. I don’t have any figures on this, but this will become an important factor in the next few months. And, as I reported a few weeks ago, there is a law that will expire in 2013 preventing the resale of some real estate (this was designed to make it less attractive for short term speculators to buy and “flip.”) They bought anyway, and they are surely going to “flip” for better or worse in 2013. (8) It ultimately is a question of supply and demand (and inflation and money supply). (9) Someone needs to determine how many housing units there are, how many are needed, and how many family units can afford to purchase and at what price. (10)Remember this, home prices in China represent 27 times the household income and the rents are 300 times the home value. (11)I see the market correcting by the second half of 2011. It could be modest and manageable correction.

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