8/12/2019 Newsletter Aug - What a Million Bucks Buys and the Bellybuttons of Others

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Not likely goes the argument made by Nie and many other sky is blue believers. But yet it is happening

right now in Wenzhou. Homeowners that are upside-down are simply walking awaygiving the bankthe keys. Story herein Chinese.

Yes, but thats Wenzhou. Wenzhou is an aberration so goes the argument. Wont happen in the majorcenters. And those people were all speculators anyway; they just walked away from apartments thathad been sitting vacant and undecorated for years. The tier one cities are different.or maybeWenzhou is a harbinger.

A story recently stated, quoting unnamed sources, that there are about 5,000 to 6,000 individuals inBeijing that each own more than 300 apartments.Which got people talking about if it could be true.And if so, who owns them? And subsequently talking about vacancy rates in Beijing. And why is it that

this data is not available? Vacancy rates is one of the most common factors used in most countrieswhen measuring the health of the real estate market. Yet in China this quite easy to calculate figure hasnever been provided. I will leave it to you to decide why we cant see an official figure on this in China.

But Beijing Public Security Bureau did cause a stir when it released innocuous figures about the totalnumber of households in Beijing. Because its calculations show that about 30% of homes owned areunoccupied, not rented not lived in. Story herein Chinese.

A more recent report from one of Beijings leading real estate agents suggests the vacancy rate in thecity is closer to 40%.Story herein Chinese. And as far back as 2010, it was suggested that in Chinathere were then 65 million vacant homes, owned but unoccupied. Story herein English.

So how much different are Chinas tier one cities than Wenzhou? Speculators control vast number ofproperties, with most sitting vacant. The true demand for actual home-owner occupied property isundetermined, but it likely has already been exceeded by supple. How far would prices need to fallbefore speculators tried to get out, and if buyers aren't available, like in Wenzhou, then how long dothey sit under-water on loans before they walk away? And if China faces a real credit crisis, what willthey do? What will the banks do, start calling in loans? What will the government do? What will you do?

For Asias richest man, it appears the risk is now too high. Hong Kong tycoon, Li Ka-Shing, is cuttingand running. Li has sold many of his mainland properties in a recent flurry of transactions. Mediareports state that Li foresees drastic changes in Chinas political and economic landscape emerging,and intends to put his money into Europe. Stories hereand herein Chinese.

I have tried to present the bullish and bearish views here from some of the experts. But I will offer mytwo-pennies worth as well. The argument I hear often is that the government wont let property pricesdrop too far, if at all. The local governments, the banks, the powerful property developers and themyriad government cadres and their associates who own multiple properties all have a strongly vestedinterest in seeing this property game continue, and they will fight any moves that will hurt thoseinterests. To say nothing of the anxiety that would be felt by homeowners who live in their property ifprices were to collapse and they suffered real losses in the value of their primary asset.

I understand this rationale. This is the dilemma the central government faces as it tries to move thecountry away from a real estate and infrastructure driven economic model. And it is certainly true that

Chinas real estate market can not be classified as driven by normal market mechanisms, if it were thena significant correction would likely have occurred already, for by any standard market measure priceshave long topped. So I get that argument.

But I think it is fools gold to believe the government will not let prices drop. Were those who boughtthe stock market at 6000 points compensated for their losses when it dropped below 1700? Is thegovernment bailing out the speculators in Wenzhou who are upside-down on their loans? Why isproperty speculation any different than stocks? Why would Beijing or Shanghai speculators be treatedany differently than Wenzhou speculators? (yes they are the centers of power but the principle is thesame).

Im not an economist, but I am not blind. I can read numbers. And on a macro-level the addiction toeasy credit looks increasingly close to crossing the Rubicon (corporatei.e. SOEsand localgovernments debt levels are particularly alarming). Whereby the government will not be able to stop acredit crisis from happening or bail everyone out if or when one occurs, even if it wanted to.

And whenever or if-ever the RMB is a fully convertible currency what will happen? How will the globalForex and bond markets view Chinas total credit/debt levels and the health of the countrys bankingand financial system? Will we see a tidal wave of domestic money leave the country? It seems to methis all will have a huge impact on Chinas financial system and real estate market, perhaps negatively. Ioften wonder why this is not talked aboutperhaps I am completely off-base seeing a link between theRMB becoming fully convertible and the countrys real estate marketany economists out there to

comment on this?

And if you believe that China's real estate market and the governments control and manipulations of itare uniquely Chinese, just take a look at Las Vegas, Nevada, the US city that has seen the highestincrease in prices, and the impact of that state governments policies. Story herein English. See anysimilarities there to our situation here in China?

WHAT IS THE STORY ACROSS THE BIG POND

As has been well reported, in many US cities property prices have risen rapidly in recent months, in

some cities the average exceeds 25%, and in some neighborhoods is close to 50%! I can speak withpersonal knowledge of the city Atlanta where I do real estate business and prices have risen onaverage 19%, and in some communities double that or more.

Do I expect it to continue at this pace? I hope not. Im not complaining about the rise, obviously I havebenefitted. But much of the price increase was not due to natural market forces, it is due in large part toinvestor and hedge fund buyers and banks withholding foreclosure activity, thus reducing supply. Sohopefully what we see is a more natural healthy growth pattern in prices moving forward. And that iswhat I expect, prices to keep moving up in months and years ahead but at a pace that closer representsowner-occupied buyer interest and the rate of inflation.

However, I will not be surprised to see a dip this wintermortgage rates are rising, investor interest iswaning because rental returns are slimming as prices go up, and although the US economy is showingsome signs of firming, jobs are still lacking and those that are created are primarily part-time. These arebut some of the headwinds still on the horizon that could create reason for doubt about thesustainability of the US real estate recover.

I am not deterred from moving forward though and neither are my partners in the US. They have beenshowing me many quality homes, turn-key ready with tenants in place, for interested investors in Chinato consider. And I am going over in October to meet with my team in Atlanta and scout new burgeoninggrowth areas of the city to purchase and renovate properties for my portfolio of rentals. It is definitelymore difficult to find real gems at huge discounts, but if one looks in the right areas there are diamondsto be found. So despite my apprehensions for the near term, I remain medium and long term positive onthe US market both as a source of passive rental income and appreciation growth.

Good investing!

Chris

GreetingLine

Firstly, if you are a regular reader, accept my apologies for the absence of the newsletter last month.Secondly, if you live in Beijing then congratulations, you are first! You have the good fortune, (or maybeits misfortune) of living in the city with the worlds most expensive real estate. Yup, based on price toincome ratios, Beijing now tops the globe in home prices! Dont despair if you live in Shanghai orShenzhen, you are number 2 and 3, although a distant second and third.

The term house-slave has never been more apt. For us working-class Beijingers, it now requires onaverage 22.3 years of earnings, that is every single Yuan and every single Mao we make, to pay off themortgage. Story herein English.

For mortgage-payers, thats the tale of woe in one sad chart. Want to see what it looks like in pictures?How much house can our hard-earned money buy here and elsewhere?

I have chosen a couple of examples using my two citiesBeijing, where I live, work and call home; andAtlanta Georgia, where my real estate businesses are located. These two homes are available rightnow, I simply took the photos and property descriptions ads directly from real estate agent listings.

For reference the US dollar figures are converted using a ratio of 1 USD = 6.157 RMB. And in China weuse Construction Area to determine property size, whereas in USA and elsewhere they use LivingArea, a handy guide is to measure living area as 85% of construction area (i.e. 100 meters totalconstruction area will leave you with around 85 meters of actual living area).

Learn MoreFor more information about the properties we have available today in Atlanta, Chicago, Memphis,Orlando, Fort Myers, Ft Pierce, and Charlotte, just contact me by email or phone.

To see the new properties we have available in Houston, Dallas, Indianapolis, St. Louis and Kansas

City, click here.In the access code line write: ChrisTeed.

How We Can Help Make It Happen

We provide a one-stop way to purchase and manage income-generating properties. Great

efforts have been made to ensure you can do this without needing to leave China! Our goal

is to make this super easy for you and to give investors great properties that earn real

returns today and in the future.

Provide you with an inventory of properties in great neighborhoods with excellent

appreciation potential.

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Provide assistance when you want to sell your property.

To hear more about all the properties we have available, and how we can help you purchase one ormore without needing to leave China, contact Chris Teed by email at bethunetoo@gmail.comor bymobile at 13681247085.

If you have friends, family or colleagues that might be interested in owning income property feel free to

forward this email or contact Chris to discuss cooperating together to help them make their purchase.

We believe now is a good time to invest in US rental properties and are happy to help you pursue thisopportunity, but if you wish to unsubscribe to this newsletter click here unsubscribe and your emailaddress will be deleted from the database.

From the end of 2008 until the end of 2013,Chinese banking sector assets will have

increased about $14 trillion. As Fitchnotes, that's the size of the entire UScommercial banking sector. So in a span of fiveyears China will have replicated the whole USbanking system!

What we're seeing in China is one of the largestmonetary stimuli on record. People are focused onQE in the US, but given the scale of credit growthin China Fitch believes that any cutback could be

just as significant as US tapering, if not more.Goldman Sachs adds that China stands to loseup to a stunning 18.6 trillion RMB should thisbubble pop.

Via Goldman Sachs,

The speed of credit expansion exceedsthat seen prior to other credit crises inhistory, this expansion has not beenmatched by economic growth, and, ofcourse, the more "shadowy" sources ofmuch of the credit growth raise doubts

about its soundness.

When you look at crises elsewhere, alot of the same precursors are presentin China....in terms of a large run-up incredit that is not matched in GDP growth.Others include a very aggressiveexpansion of shadow credit, massiveinvestment in property leading to a bubblein some locations, weak risk managementat banks, and heavily state-directed

financial and corporate sectors.

Another very important issue in China thatisn't cited often enough is moralhazard. There is tremendousconfidence in the ability and thewillingness of the central governmentto bail everyone out. But as the systemgets bigger and bigger, there are morequestions about how feasible that is.

On top of all of these financial systemissues, China's growth model is peakingout. A few years ago nominal GDP growthin China was in the mid-teens. In that typeof environment, problems can easily get

papered over. It's only when growth slowsthat the challenges really start to surface.

WHERE TO GO FROM HERE?

Astonishing really. A Beijing villa costs 3X what a mansion costs elsewhere. Yet if you were to rent itout, you would generate just 25% more income each month. One graph and two groups of pictures,summarizes the story of real estate realities today in different localities better than a thousand wordscould.

But now what? Where will prices go? Having an opinion on the future of real estate prices in China is alot like having a belly-button, everyone has one, and no one belly-button is much better than another.Generally though opinions fall in one of two campseither youre a bull or a bear, or as I call it, the skyis always blue team and the sky is always grey team.

One of the loudest voices on the sky is blue team is famous blogger and real estate developer RenZhiqiang, who accurately predicted in 2009 that Beijing would see property priced at 50,000 RMB/meter within 5 years, a prescient call that came about ahead of schedule. Perhaps the most commonlyheard voice representing the sky is grey team is Xie Guozhong (Andy Xie). Xie was roundly acclaimedas being one of the first to predict a crash in Chinas stock market back in 2006/07, and has since been

roundly mocked for his persistent call that Chinas real estate will see a 50% drop in prices within 5years. Story link here(in Chinese)

Recently Ren upped the ante considerably, stating that within 5 years most property inside thefourth ring road will cost 100,000 RMB/meter or more. As if on cue, Xie wrote an article stating that ifthe government unleashes another round of stimulus aimed at the real estate market it will likely triggera financial crisis. Stories herein Chinese and herein English.

Is 100,000 RMB/meter soon to be the new normal for Beijing then? There have already been isolatedexamples. In March of this year a listing in Wudaokou for a tiny 37 meter flat priced at 3,500,000 RMBcaused quite stir amongst Beijing netizens. Story herein English.

But that was just a small tempest compared to netizens reactions of disbelief, rage or joy (depending onwhether they own property or not I suppose) to the analysis offered early this month by the Director ofReal Estate Research Center at Beijing Normal University who said that based on the past 10 years ofgrowth Beijings property prices could easily exceed 800,000 RMB/meter in 25 years. Story hereinChinese.

In the same story, Ren Zhiqiang chimes in with thisrationalizationBeijings property today is not over-priced atall. That the standard metric of using city residents earningsas a ratio to measure price levels doesnt apply in Beijingbecause it is not a city of residents, it is an entire nations city.

So he says to measure price to earnings we need to considernot the average, common residents of Beijing, we need tocalculate based on the earnings of those who want topurchase Beijing propertythat is the wealthy people from allover China. Using their earnings as a measure of price, thenBeijing property is not at all expensive, it is in fact cheap.

I will leave it to you to decide if you agree with him or not.

If one believes the sky is blue team, its an easy decision then. Its wise to buy now, buy more than one;buy as many as possible to take advantage of the low prices, and wait for the appreciation that will

surely follow. Then sell and retire rich, rich, rich.

I dont know if they will be proven correct or not. But I do know thisif Beijing property will cost 800,000RMB/meter then a coffee and donut at Starbucks will cost 1,000 RMB. And a 100 Yuan bill will not beworth the paper it is printed on, such will be the hyper-inflation in China.

CLOUDS FORMING OVERHEAD

Hu Bao Sen, another charter member of the sky is blue team, in a recent interview defended Chinasproperty prices as reasonable overall and that we do not have a bubble. But in making his argument Hutouched on one of the elements that has the sky is grey team so concerned. Hu says the reason pricesare going higher is because there is too much money in circulation, as an example he pointed toChinas monetary supple and capital currency accounts saying M2 in 2002 was 20 trillion Yuan, in 2012it reached 96 trillion, and as an aggregate of GDP the M2 is now almost double. Story herein Chinese.

It is Chinas monetary supple and the associated credit and asset leveraging that the sky is grey teamfocuses most on when they express their strong doubts that property prices can continue upward,rather they will likely decline or even crash. It is hard to read these charts and not see why the sky isgrey team is worried. Story extract follows below, the full story and graphs can be found herein English.

Another noted sky is grey economist, Michael Pettis, expresses it this way: It is, to me, astonishing thatChina in just five years is replicating the entire US commercial banking sector, and yet so manyanalysts are expressing delight with Chinas return to growth. Of course you can generate growth if

you force such a tremendous expansion in credit, but this is simply unsustainable. Read his fullcomments herein English.

Famed economist Rudiger Dornbush once said:The crisis takes a much longer time coming than youthink, and then it happens much faster than you would have thought. It takes forever and then it takes anight.

But China blogger Nie Qingping offers this often heard claim: that if China has a bubble then it isdifferent; a bubble with Chinese characteristics. In his post herehe makes three common arguments:

Those that bought early have done so well that even if prices collapse they are still ahead

Demand still outstrips supply so how can a crash occur Down payment requirements in China are much higher than they were in the US, for example, during

its property bubble so some fluctuations in price wont lead to a crash

The comments section of his blog offer some interesting reactions to his opinion, but I will add a fewfrom other sources.

A look at household liabilities across Asiawould suggest that in fact Chinese citizensmortgage payments represent anuncomfortably high percentage. Undoubtedly

due to the high price of purchase.

How far would prices need to fall beforehomeowners down payment equity wassqueezed?

Is it possible that we might see upside-downloan values happen in China like happenedin the US?

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