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I just returned from China for the second time in a little over a year and have yet been able to make sense of their domestic housing market. I am not talking about their must discussed housing bubble phenomenon or whether they have a housing bubble in the truest sense. I am talking about what seems to be a lack of a re-sale market.

After years of communist rule, the concept of home ownership in China is relatively new and appears to be in its early stages of development. Because growth in housing construction has been astronomical with all sorts of distorted metrics – their use of cement in 3 years (2011-2013) was more than the amount used in the U.S. over 100 years (1901-2000).

Housing accounted for at least 15% of GDP in 2015, down from 22% in 2013. This is why we are seeing large Chinese construction companies working all over the globe these days – due to oversupply of new housing in China. The opportunities for revenue growth at the same pace seems limited.

On the bullet train we rode from Bejing to Shanghai, there were high rises under construction on both sides of the train tracks for most of the 5.5 hour trip. It’s hard to comprehend how much construction is underway without seeing it first hand, but it is massive.

The scene during much of the 5.5 hour bullet train ride from Beijing to Shanghai. Construction sites dominated the view / I didn't think there were so many construction cranes in the world, let alone one country.

A video posted by Jonathan Miller (@jonathanmiller) on Nov 18, 2016 at 12:55am PST

Ghost Cities v. Ghost Towns
Unlike ghost towns in the U.S. which are abandoned after the economic forces are no longer in play, ghost cities have never been occupied. I think this is a pretty obvious flaw of central planning. I learned that incentives play a big role in unnecessary construction. In order for provinces to receive income from the central state, they are encouraged to generate GDP. Construction of apartment buildings is a quick way to boost GDP but there didn’t seem to be concern about their eventual occupancy (a la, build it and they will come). Also since the government owns the land, developers pay ongoing fees for using it. Our tour guide said that there were at least 40 ghost cities in China although this study says there are less. Here is a map of known ghost cities:

Multiple generations pooling their equity
Housing prices have been rising at about 17% annually for a decade – versus 11% disposable income growth of city dwellers. Rising prices have forced many buyers to pool the financial resources of as many as 3 generations of family. This shows how much is at stake for the Chinese government – if the housing bubble was to collapse. Yet same people I spoke with that expressed faith in the housing market showed grave concern over the integrity of their stock market. What alternative investments aside from housing does the typical domestic investor have? Especially since Chinese housing prices increased 53% in the past year?

However I am trying to get an answer for a much more basic point.

Is there a substantial Chinese re-sale market?
I feel way out on a limb when I say the following: few investors actually sell their apartments in the newly constructed apartment buildings.

I asked investors and real estate professionals in the Chinese housing market; four of our tour guides of the past few years; various people I met there during The Real Deal Shanghai conference: “Do investors sell their new apartments?” I consistently got a blank stare for a few moments as if the question had never come up before. A few people told me that buyers hold on to their investments for the long term and “no one sells.” On one of the real estate panels I moderated in Shanghai, a real estate professional made a comment that Chinese investors always prefer new.

The government has been trying to cool the market, requiring much larger down payments for investors, i.e. 70% and limit purchases to 1 per investor, but demand and creative work arounds, such as bogus divorces to skirt restrictions, remains high.

Moderated 2 great panels at @trdny Shanghai event. Packed house. Rabid interest in U.S. real estate investment was apparent. Hard to appreciate the intensity until you see it first hand.

A photo posted by Jonathan Miller (@jonathanmiller) on Nov 19, 2016 at 5:06pm PST

U.S. re-sales (existing sales) have accounted for roughly 85% of total U.S. housing sales over the long run. Granted, China is new to the concept of home ownership so the re-sale market would not dominate housing sales like it does in the U.S. But without a vibrant re-sale market, the “value” derived from Chinese housing market indices tell us Chinese housing price trends must be almost exclusively based on the newest home construction sales prices and that equity is not tangible.

Home sales seem to be a one-way transaction. Investors that buy a home feel wealthier as their investment rises in value. Theoretically that gets them to go out and consume, i.e. the wealth effect. However the market share of consumer spending in China is roughly half the 60% market share seen in the U.S. so they have a long way to go. While the Chinese investor may enjoy rental income when an active rental market exists, domestic housing purchases seem to be driven by a long term equity play.

I have found no anecdotal evidence of the widespread selling of existing properties that were recently developed. There doesn’t seemed to be a tangible moment when the recent investor expects to cash out the equity realized on their purchase of several years ago. If this is an incorrect observation and there indeed is a vibrant and active re-sale market of newly constructed housing, I was unable to see one or be told of one by consumers and real estate investors who live there.

So please clue me in.

Tags: China, Chinese investors, housing bubble, Foreign Policy

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[Source: Yahoo News]

Last weekend I read two terrific articles on Chinese real estate investment in the U.S. but they seemed seemed to conflict – check out the headlines:

New York Times Chinese Cash Floods U.S. Real Estate Market

Wall Street Journal Chinese Pull Back From U.S. Property Investments The subtitle says it all – The nation’s economic and stock-market slump puts buyers on the sidelines

Are the Chinese flooding the U.S. market now or are they pulling back? Which is it? Or is it both?

In my recent trip to Shanghai, I spoke to and interviewed many, many real estate investors at The Real Deal Forum. I got the impression that investment has pulled back a bit in 2015 but expectations were high that investment would expand again, although not to the level of the past 5 years. Of course I was doing this in a biased environment – at in investor conference. I was consistently told that government efforts to prop up the stock market spooked much of the smart money out of the market since the actions were taken to calm everyday investors.

The New York Times piece seemed prompted by a P.R. pitch from the Chinese developer for their Dallas suburb project enticed with a suburban angle. It was a refreshing angle since Chinese real estate investment in the U.S. has been an urban narrative and specifically focused on the high end. The article illustrated just how massive the investment patterns have been. To date the narrative has been focused on super luxury condos in expensive metropolitan areas, while the suburbs got limited attention.

The WSJ article is more orientated towards the past few weeks while the NYT article is a longer term view. Both publications place emphasis on NAR’s Profile of International Home Buying Activity whose results emphasized the Chinese investment surge of the previous year. The survey results only reflect the market through last March, so it is 9 months behind the current market. The Chinese investment numbers are staggering, and they are probably understated. Since the NAR report is simply a survey of it’s members and NAR has limited exposure to New York City, especially Manhattan – a hotbed of Chinese real estate investment activity.

Incidentally, do the above 2 charts look similar? They both relied on the NAR report.

The NYT piece set the table on the entire multi-year phenomenon using a ton of cool charts while the WSJ attempted to illustrate the change in recent weeks Both outlets were forced to rely on a lot of anecdotal to make their case. Both articles are consistent with my views as each provided a different context.

The NYT piece provided the long term historical view and the WSJ was a short term snapshot.

Tags: China, Chinese investors, smog, climate change, Profile of International Home Buying Activity, NAR Research, NAR, National Association of Realtors

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Here’s a summary of potential future actions by Chinese investors with the recent spate of volatility in the financial markets.

According to Jonathan Miller, president of appraisal firm Miller Samuel, the tumult in China may lead to even more money finding its way into American residential and commercial real estate. “There are not a lot of investment vehicles in China,” said Miller. “You have the [Chinese] housing market, which is a pretty significant bubble. You have thousands of ghost cities that have been constructed. On top of that, you have a pretty volatile stock market situation. So there is some speculation that there actually will be outflow as a result of this and maybe that will end up in the U.S.” Costello concurs with Miller, noting that China’s insurance companies have been allowed by their regulators to invest in foreign real estate only since 2012. “Unless and until they have to cover losses at home, they’re not going to sell these properties,” said Costello. “They’re going to hold them for the long term.”

Tags: Yahoo! Finance, China, Chinese investors, Chinese stock market, Jim Costello, economist, Real Capital Analytics

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To keep the sales going, developers in the massively bloated Chinese housing market are getting more creative. This NY Times short documentary is fantastic and surreal. I’d chalk it up to simply bizarre, if there wasn’t such a desperate undertone to it.

It reminded me of “The Truman Show” movie where everything Jim Carrey’s character saw was fake, made for him. However in the Chinese version, everyone knows it’s fake but embraces it.

With the massive oversupply, no wonder savvy Chinese investors are extracting as much wealth as they can and investing overseas in anticipation of that day of reckoning.

Tags: China, The Opinion Pages, rent-a-foreigner industry, fake

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I’m not saying the US isn’t seeing an uptick in buyers from China, especially housing markets such as Manhattan. After all, there is a global trend where money is chasing stability and safety. US real estate has been a key beneficiary of this trend.

However it is important to realize that there is no US data from independent sources that links overseas nationalities with residential real estate purchases. Why?…because of long time concerns in the US about fair housing laws and by extension, the gray area of tracking nationalities to housing purchases although it is the norm outside the US.

When any housing trend is discussed, it is important to understand where the source of the trend came from. I’d really like housing market followers to appreciate that the trend analysis on the foreign buyer subject bantered in the media as of late is literally based on nothing. There has been an outpouring of coverage of the topic over the past few months, but the sourcing is only from real estate brokerage anecdotes because that is all there is for reporters to work with. I was interviewed for some of the following articles but disagreed with the general story premise, and I assume that is why my view wasn’t inserted.

Whichever stance you take on this particular trend – that Russians used to dominate the Manhattan housing market and how the Chinese have taken their place at the top – there really is no wrong answer, because there are no facts. All sourcing on the topic to make that point are from real estate agents referring to their opinion, often based on their past few transactions.

Russia
I first noticed this new new storyline when Russia invaded Crimea. Would the Russian position as the number 1 foreign buyer of real estate in Manhattan now go away? The brokerage community, or at least a couple of real estate agents claimed this to be the case.

I have no evidence to the contrary even though there are huge capital outflows from Russia that began with the Russian invasion of Crimea. In my view, the real estate agents were confused by the high profile sales by Russian buyers (think of Russian Oligarch buying 15 Central Park west for $88M) and perhaps has some direct feedback in some of their own transactions. However I don’t think Russians were ever the top homebuyers in Manhattan, just the highest profile.

If we have learned anything from the current Manhattan new development boom, it is the fact that high profile, high end transactions are not a proxy for the balance of the market much like a handful of high profile Russian purchases are not a proxy for some sort of Russian real estate dominance.

Manhattan Real Estate Feels a Russian Chill [NYTimes]

China
Now that the Russians are “out” (see previous) of the top spot, that must mean that the Chinese are “in.” Check out the headlines to this storyline although much of these articles build on the Reuters piece (linked below) which is based on real estate agent anecdotes. A slew of brokerage PR driven stories on the Chinese are now dominating the real estate headlines in New York City.

Perhaps this uptick as something to do with recent closings at well published Chinese buyer favorites like One57 and perhaps the fact that China is poised to become the world’s number 1 economy.

NY real estate firms woo Chinese buyers [China Daily] The Chinese take Manhattan: replace Russians as top apartment buyers [Reuters]

U.S.CHINA’S RICH BECOME BIGGEST FOREIGN APARTMENT-BUYERS IN MANHATTAN [Al Jazeera]

Who are the dominating the foreign buyers of Manhattan real estate?
Anecdotally I think it remains Canadians but is dominated by Europe (UK, France, Germany, Italy, Spain, Ireland, etc combined) because they are still the largest tourism group. Brazil doesn’t get enough respect since they are the 3rd highest source of tourism to NYC. This list is 2 years old but I doubt China has passed Europe or even come close but this is, shall I say, “anecdotal.”

From NYC & CO., here are New York City’s top international sources (2012 figures):

1. Canada 1,063,000
2. United Kingdom 1,033,000
3. Brazil 806,000
4. France 667,000
5. Germany 605,000
6. Australia 595,000
7. PR China (excl. Hong Kong) 541,000
8. All Middle East (incl. Israel) 478,000
9. Italy 449,000
10. Mexico 387,000
11. Eastern Europe 384,0000
12. Spain 380,000
13. Japan 328,000
14. South Korea 281,000
15. Argentina 272,000
16. Ireland 224,000
17. India 215,000
18. Israel 203,000
19. Netherlands 203,000
20. Sweden 190,000

Tags: Canada, Russia, China, Brazil

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[click to play – starts at 13:50]

I spoke with Michelle Makori on the state of Fannie Mae (who just reported a record profit). CCTV America is part of China Central Television (CCTV), the largest television broadcaster in China.

Tags: CCTV, Fannie Mae, Michelle Makori, China

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[click to expand]

I was sent this chart via my friend who saw it in The Atlantic who sourced it from prolific blogger Paul Kedrosky. Given all the US real estate demand coming from foreign buyers I really liked the context this chart provides.

…dive into 2000 years of economic history, this time through the lens of GDP per capita around the world. This metric helps us identify where growth in wealth occurred, as opposed to just growth in population (e.g.: India and China had thee-quarters of world GDP in 1 AD because they had three-quarters of the world’s population).

Developed countries are taking market share from the US but I like how it illustrates how large the US economy really is. Was surprised to see the Russian share so small, especially over the past decade.

Tags: MRIS, The Atlantic, Paul Kedrosky, China

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[click to play clip]

I did a short interview on Bloomberg yesterday regarding their coverage of Knight Frank’s 2010 Wealth Report

The Bloomberg coverage was in reference to my contribution to the report via interview where they matched me up against their analyst Xavier Wong, Head of Research for Greater China and Hong Kong.

The prime New York market, where prices fell 12.5% in 2009, is gaining strength , but the recovery is tentative, says Leading New York property commentator Jonathan Miller

The frozen market in Manhattan in the first half of 2009 gave way to a much stronger second half of the year. By the summer, the market began to see a recovery in sales activity following an improvement in economic confidence prompted by a revival in the stock market.

While the market has undoubtedly improved compared with last year, we ought not to get too excited. The recovery of late 2009 was a short-term uptick, due in large part to a release in pent-up demand. My view is that the surge in demand is not the start of a rising housing market. While sales are up sharply, prices have moved “sideways.”

I have some lingering concerns for the New York market in 2010. The market has been aided by government stimulus measures – tax credits for first time buyers, in particular. This package will expire in mid-2010. While the US economy is growing, the high rate of unemployment – around 10% and somewhat higher locally – as well as a tight mortgage lending environment do not provide a firm basis for ongoing growth in house prices.

A real fear for 2010 is rising mortgage rates, currently at near record lows. The potential for growing foreclosures, which were not a problem in 2009, is another real factor.

One segment of the market that has seen a noticeable uptick has been international demand, where the weak dollar has prompted interest from Asia, Europe and South America. Demand from South Korea has also become more noticeable.

Looking outside New York, both Boston and Washington DC have also improved, with rising resale volumes in both markets. On Long Island, the Hamptons luxury second home market has surprised everyone with its resilience to date. As a discretionary market, there was general concern that this region would see large declines in prices and sales from the 2008 and early-2009 market turmoil. In fact, both sales and price trends have remained in line with the Manhattan market.

Watch the clip which summarizes the report [Bloomberg]
Open 2010 Wealth Report [Knight Frank]

Tags: Europe, Television, China

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[click to open report]

The Wealth Report 2010 was released today by Knight Frank Research. It is a much anticipated annual survey targeted at the high end consumer with great detail on global residential property trends. The report covers 56 high end housing markets across the globe.

Check out The Housing Helix podcast for my interview with Andrew Shirley, Editor and Liam Bailey, Head of Residential Research for the Knight Frank Wealth Report 2010.

I had provided commentary on the NYC housing market for the report.

….While the market has undoubtedly improved compared with last year, we ought not to get too excited. The recovery of late 2009 was a short-term uptick, due in large part to a release in pent-up demand. My view is that the surge in demand is not the start of a rising housing market. While sales are up sharply, prices have moved “sideways.”…

Some interesting data points:

• Overall annual global decline was 5.5%
• Monaco saw prices as high as $5,900 p/SF US.
• 73% of cities saw year over year declines versus 40% last year.
• Middle East down 27.5% – the largest decline – Dubai showed a 45% drop.
• Asia Pacific up 17.1% – the highest increase – Shanghai showed a 52% gain.

In light of this strong growth, the Hong Kong government has threatened measures to restrict the market – notably through mortgage lending restraint, reducing, for example, the mortgage limit for luxury property from 70% to 60%. Despite these potential restrictions the market continues to grow.

This example points to an interesting development. The crippling impact of property bubbles bursting in Europe and the US has created a much more confidently interventionist approach in China, Hong Kong and Singapore (where cooling measures were introduced in September last year) among other markets.

Listen to the interview with Knight Frank [The Housing Helix Podcast]
Download The 2010 Wealth Report [Knight Frank]

[click to play clip]

Update: Just came across the Bloomberg video and my interview giving a quick take on the US luxury portion.

Tags: Europe, China

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Well this morning, I got up at 4:15am to do a live C-Suite interview on Fox Business News at 6:45am. Always fun and I enjoyed meeting Jenna Lee in person after having known her only via telephone when she was a reporter. I must have done ok since they invited me back next friday morning. 😉

Here’s this morning’s clip.

We talked about both housing starts and my appraisal firm, Miller Samuel. I had thought that the April numbers would show further decline. March was the lowest in 17 years and was down by 2/3 from the January ’06 high. Economists surveyed generally thought starts would be down around 1.4%.

Surprisingly, starts were up.

Starts jumped 8.2% but that was due to multi-family starts. Single family starts were actually down 1.7%. Overall starts are down 30.6% from the same time last year.

Bad Stats 101

Check out the Census’ press release quote:

Privately-owned housing starts in April were at a seasonally adjusted annual rate of 1,032,000. This is 8.2 percent (±14.5%)* above the revised March estimate of 954,000, but is 30.6 percent (±6.7%) below the revised April 2007 rate of 1,487,000.

Translation of up 8.2 percent (±14.5%): Overall housing starts were anywhere from -6.3% to +22.7%. Seems wildly vague, doesn’t it?

Single-family housing starts in April were at a rate of 692,000; this is 1.7 percent (±11.7%)* below the March figure of 704,000. The April rate for units in buildings with five units or more was 326,000.

Translation of down 1.7 percent (±11.7%): Single-family starts were anywhere from -13.4% to +10%. Seems wildly vague as well.

If you think about it, nothing has really changed since last summer’s credit crunch that would change the direction of the housing market.

• How can we talk about a bottom yet?
• What market force is going to get more people to buy right now?
• What economic force is going to stimulate demand as we approach or are in a recession?

The credit markets are still frozen, mortgage rates have risen, underwriting standards are higher and reduced the buyer power of consumers.

“The headline increase in starts means nothing; it is all due to a rebound in the hugely volatile, but essentially trendless, multi-family sector,” said Ian Shepherdson of High Frequency Economics.

Builders have been reluctant to build because demand for new homes has plunged and the supply of unsold property remained high. The latest data show new-home sales, for March, were down 36.6% from a year earlier. On Thursday, the National Association of Home Builders reported its index for sales of new, single-family homes slipped to 19 in May from 20. The gauge is based on a survey of builders asked about prospects for sales.

“The magnitude of the housing bubble was unprecedented, and the corrective process promises to be a long and painful one,” MFR Inc. Joshua Shapiro said of the NAHB data. “Hence, it is hardly surprising that builder sentiment is still languishing very near its all-time low.”

As far as Miller Samuel (my appraisal firm) goes, we have been booming since February. Fox Business inadvertently inserted a text banner during my interview that referred to our now defunct acquisition by RL from last fall. I had terminated the take-over in March.

Our firm is built for a down housing market because lenders as well as other clients actually want to know what the value is and the nuances of housing markets we cover, rather than only the number needed to make the deal. We did not fare as well as others during the housing boom because of the erosion of underwriting standards and the shift of appraisal work from retail lenders to mortgage brokers.

The current lending environment is encouraging, in a contrarian sort of way, by getting back to basics. Hopefully this will permeate the entire lending process.

The housing boom was tough for appraisers who refused to bow to pressure to push values higher than they should have been and the work was given to those who would.

But the world is changing, and like the IRS, we are here to help…

From the:

Who Cares But
It’s Still Cool Department:

Christine Haughney’s Collateral Foreclosure Damage for Condo Owners in the NYT yesterday that sourced and used us for background, was the most emailed article in the New York Times both yesterday and today. THAT is cool (to me). It was designated to be an A1 story but was bumped for the earthquake in China coverage.

Tags: Commerce Dept, NAHB, Fox, Census, Television, China

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With the credit market turmoil, I have begun to wonder whether I am seeing red and gravitating towards all things red. In real estate parlance, this could mean the real estate market is HOT or the real estate market represents DANGER.

Red is a color that represents an extreme.

The other day, I got the second issue of Portfolio magazine, which is a terrific new Conde Nast publication and has a great interactive web site. The covers alone are worth the purchase price. There have been a few articles that cover real estate topics. The one I really enjoyed was called Little House on the Red Prairie by John Cassidy.

The US is the largest debtor in the world with $10.7 trillion on $13.6 trillion economy (hey that’s 79% financing, sort of). Once the Fed started raising rates in June 2004, in the first of 17 consecutive increases, there was an expectation that housing would cool. But some of the highest appreciation rates for appreciation rates occured after this point.

Since the middle of 2004, the Fed has taken the federal funds rate—what it charges banks on overnight lending—from 1 percent to 5.25 percent. Nor mally, such a dramatic shift would prompt a sell-off in long-dated Treasury bonds and a rise in long-term interest rates. This time, that didn’t happen. Thanks to all those central banks stocking up on paper issued by Uncle Sam, the interest rate on 10-year and 30-year Treasurys, rather than jumping to 7 percent—which might have been predicted based on past experience—stayed closer to 5 percent.

The author suggests that China’s investment in low-yield treasuries helps keep access to US markets and technology. Low mortgage rates fueled the burst in home price appreciation of 2003-2005.

And then of course, there is the little red paper clip…

In today’s New York Times, there was a very entertaining article about how Kyle MacDonald was able to trade a red paper clip for a house in: Trading Up From Red Paper Clip to White Picket Fence. This lead to a book deal along the way.

Of course that’s a simplistic version of the story. Basically he posts an announcement on Craigslist and the trades keep growing in scale. Public relations followed and a town in Canada opted to give him a house. Not a full proof way to get into real estate, but its certainly different and creative.

It was a dull day in Montreal, two summers past. The young MacDonald, his fair girlfriend toiling at her labors, was Lying About the House in their minuscule apartment, thinking about What a Drag It Is to Pay Rent and how nice it would be to Own Your Own Place and Stuff Like That when a thought occurred. What if he could trade a red paper clip for a house? Not in one swap but in a bunch of swaps, as in the game Bigger and Better, which he did play when he was but a youth.

Here’s an ABC News segment…

This story should probably be a staple (sorry) of everyone’s news reading today.

Tags: Canada, China, Canadian Housing Market

1 Comment

It is not uncommon for tenants and homeowners to refuse to move out or sellout to developers. They simply don’t subscribe to the argument by the developer that, besides the money, it is being done for the greater good. In order to apply pressure, the developer builds taxpayers, usually one story buildings with short term tenants that pay enough rent to cover the real estate taxes. The developer simply waits, sometimes for decades until they are able to aquire the site.

Here’s an old New York Times article that provides some hold-out stories.

The page one photo in the New York Times yesterday was something more surreal. The Chinese developer simply dug out around them. The homeowners in New London, CT who were booted from their private homes by eminent domain might look at this for inspiration.

Update: More photos.

Tags: London, China

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