Yesterday, the China Banking Regulatory Commission (CBRC) announced stress testing of banks with modeling to include a 60% price fall of house prices in China’s 7 top tier cities including Beijing, Shanghai and Shenzhen.

Today, it has been reported the stress tests will not only include banks, but extend to other industries closely linked to housing such as cement and steel. The China Daily reported :

“The banking system has made quite a lot of loans to industries upstream and downstream from the real estate market and their risks are intimately connected to the real estate market,” the Shanghai Securities News said. “Therefore, regulatory agencies have demanded that corresponding stress tests should also be conducted for industries such as steel, cement and building materials.

The stress tests follow recent reports that 64.5 million urban electricity meters recorded zero electricity consumption over a 6 month period. Based on these numbers, it is predicted China could house 200 million people in these empty apartments. This should come as no surprise as in April, we reported on a China Reality Research report suggesting nearly a fifth of all recently sold properties were kept vacant.

Due to low interest rates, cash deposits in China fail to keep up with Inflation. As a result Chinese prefer to put their money into assets that “hold value” such as property. In a blog published by the Sydney Morning Herald, Malcolm Turnbull writes :

One property analyst was very candid when asked why there were so many apparently unoccupied flats in Beijing as there were no lights on at night: “The flats are occupied. Cash is living there.”

Stress testing on other industries should raise concerns back in Australia. How much of our resources and mining boom was a result of China’s housing bubble, and what will be the impact for Australia when it pops?

» China widens stress tests to steel, cement - media - The China Daily, 6th August 2010.

» Chinese Debt Binge is fueling a dangerous property bubble

New Zealand Finance Minister Bill English has told Business Leaders at Auckland’s Mood of the Boardroom breakfast yesterday that by international measures, Australia’s and New Zealand housing markets are “still way overpriced” even going as far to say they are higher than China.

“By any international measure, our housing market it still way overpriced. Ours and Australia’s are even more expensive than China’s. Is it going to stay that way? I would like to hear the case as to why it would,” English said.

» NZ housing ’still way overpriced’ says English - The New Zealand Herald, 1st July 2010.

China’s annual audit has reveled some of China’s provinces have serious debt problems. Liu Jiayi, head of the National Audit Office wrote in the report “The scale is large, and the burden is quite heavy”.

In 2008 when global demand for China’s products started to fall, the government, like many around the world embarked on a stimulus program to flight off recession. Much of this was undertaken by local government created companies or SOE (State owned enterprises) investing in infrastructure projects such as empty apartments and office towers. Earlier this year we reported that the central government had banned 78 SOE from making further investments in real estate.

The Telegraph reports that many of the Chinese provinces are large and equivalent to major European countries. It cites an example of the The southern province of Guangdong having the same population than Germany. Previously the budgets of provinces were state secrets and this is the first time the level of debt has been disclosed.

Northwestern University Professor, Victor Shih believes the total sum of local government debt in China could be 11.4 trillion yuan or equivalent of 71 percent of China’s nominal GDP. He has researched more than 8,000 state owned local investment companies concluding that orders to ramp up spending on infrastructure after the GFC could leave China with widespread debt problems.

According to China’s banking regulator, outstanding loans to local government financing vehicles soured 70 percent last year hitting 7.38 trillion yuan at the end of 2009. As infrastructure projects continue to burn cash with little return on investment, Mr Shih suggests China could be in for a “pretty large-scale financial crisis around 2012″ if nothing is done to address the issue.

» China’s chief auditor warns mounting local government debt a risk to economy - The Telegraph, 24th June 2010.

» China auditor: local govt debts pose economy risk - Bloomberg, 24th June 2010.

On Friday, Beijing introduced rules limiting families to the purchase of one new apartment in a further bid to squash rampant speculation in its property sector. Banks have also been directed to refuse home loans to applicants who cannot prove they have paid taxes and contributed to social security for at least one year in Beijing.

According to an AAP article, the average price for a 90 square metre apartment at the Beijing Real Estate Expo was 1.9 million yuan. The average per capita income was 17,175 yuan in 2009, making the average new apartment 110x income.

» Beijing limits buyers to one apartment - Yahoo, 1st May 2010.

The China Daily today published figures from the China Index Academy (CIA) showing the China residential property market is beginning to cool.

Of the 35 cities the CIA monitors, 21 showed a fall in the number of sales last week.

Hangzhou suffered the largest drop in transactions with a fall of 72.6 percent in the past week. Beijing fell 45.5 percent, Shanghai 32.9 percent and Shenzhen - 63.9 percent.

General Manager of property agency Centaline China, Mr Li Wenjie said he predicted property prices to fall 30 percent in the third and fourth quarter this year.

» Realty sector cooling off - The China Daily, 27th April 2010.

In a bid to further restrict the speculative housing bubble in China, the central government has raised the LVR for families purchasing a second home from 40 to 50% and set the minimum LVR for First Home Buyers purchasing property that is larger than 90 square metres at 30%.

Further restrictions were made on Saturday paving the way for commercial banks to refuse loans to people buying their third home.

The changes lead to a 4.8% fall in the Shanghai Composite today, the biggest fall in eight months.

» Chinese shares plummet nearly 5% over tightening moves - China Daily, 19th April 2010.

» China ups war on property prices - The Australian, 19th April 2010.

» China moves to prevent property bubble - CNN, 16th April 2010.

The China Daily has reported on a 467 percent increase in trading volume for Shenzhen second hand houses in March as speculators headed for the exits. The report from the Wuhan Even News on Friday even suggested that some investors have hundreds of homes for sale.

» Speculators leaving Shenzhen housing market - China Daily, 16th April 2010.

Last week, the China Daily reported that predictions of China’s housing bubble crashing in 2011 had flooded the Internet after a comparison was made between China’s runaway property market as that of Japan in 1991. The correction in Japan’s market caused a depression and 20 years of pain.

According to a survey released on the weekend from China’s central bank - The People’s Bank of China, approximately 42 per cent of buyers have suspended plans to purchase an apartment this year. Most have done so on the expectation prices will drop.

The survey shows over 14 percent expected house prices in Beijing to drop in the next three months with another 13 percent expecting drops within the year.

According to China Reality Research, property sales have already started to take a turn. In survey results published in Property Monthly, China Reality Research, February 10, 2010 nearly a fifth of all recently sold properties were kept vacant. In China, like has been the case recently in Australia, property speculators buy with a view of capital gains rather than rental yield. Apartments in China generally loose value if rented out.

In a GMO white paper, titled “China’s Red Flags”, author Edward Chancellor writes Beijing now has a house price to income ratio above 15 times. In contrast, prices of Tokyo condos peaked at 9 times in 1990 prior to Japan’s property correction.

A correction in China’s property market may dent the enthusiasm of Chinese buyers to purchase property in Australia, but the impact is likely to be felt more heavily through less demand for the resources required to build China’s increasingly empty apartments, office towers and shopping centers.

» More buyers delay home purchases: Poll - The China Daily, 6th April 2010.

» Collapse predicted as housing prices continue to soar - The China Daily, 3rd April 2010.

According to statistics released by the China Land Survey and Planning Institution, house prices in China increased 25 per cent in 2009, the biggest increase since 2001.

However, data from the National Bureau of Statistics suggest house prices only rose 1.5 per cent in 2009, a five year low.

While both indexes use different methods and data sources, the National Bureau of Statistics is suggested to use figures collected from property developers who may lower the figures.

Property developers want to hide the size of the property bubble in China on fears the government will try to slow it down to prevent it from bursting. And slow it down, they are.

The government has been working hard to control lending earlier this year. The most recent measures has seen 78 SOE (State Owned Enterprises) banned from making further investments in real estate. SOEs have been bidding up land prices and have been found have a major role in pumping up prices.

» Housing prices increased by 25 percent: report - China Daily, 2nd April 2010.

With mortgage approvals in Australia falling of a cliff, and Real Estate agents reporting such a strong property market at a time when the market is flooded with near record levels of listings, one has to ask who is buying?

Mortgage approvals in Australia are down 21 percent from its peak in September 2009. The last month of data shows a 7.9 percent fall for January making it the biggest fall in mortgage approvals for a decade. Since then banks have been continuing to tighten loan value ratios (LVR) for both first home buyers and investors, suggesting bigger falls are to come. It is starting to become common to require a 20 percent deposit, which means for both investors and first home buyers, some sizable and solid savings are required before they can enter the market.

Residential property markets around the country are inundated with listings. The Sydney Morning Herald has reported Sydney has a record 2860 houses and units for auction this month, double the 1400 listings the same time last year. Despite this, Real Estate agents are continuing to report a shortage of homes for sale to create an atmosphere of utmost urgency – buy now or be priced out for ever they claim. The Melbourne Age even writes the “Red Hot Melbourne market starts to glow white!”

So if the number of listings is going through the roof, yet the number of loan approvals through the floor, what is underpinning the market at the moment? Cash savings you say – very funny, we spent all our savings years ago.

The answer may come from the easing of restrictions for foreigners to purchase properties in Australia. In 2008 during the GFC, the government needed to find ways to get more money to flow into Australia to underpin the “strength” of our economy. One such way was to remove some restrictions and make it easier for foreigners to purchase property without government or FIRB (Foreign Investment Review Board) approval. The government called it streamlining of administrative requirements.

While all statistics sourced from Real Estate agents and their lobby groups should be taken with a grain of salt, some RE agents are suggesting as much as 30 percent of all residential property sales at present are to foreigners. With a surge in listings, and loan approvals down 21 percent to the end of January 2010, there is no reason to doubt that number. If anything it could be a little light on, but remember Real Estate agents exaggerates the numbers, so potentially the market isn’t glowing as white hot as some would want you to believe. Maybe the white is actually a yellowish-orange tinge at 3200K, not 6500K (degrees Kelvin, a measure of colour temperature).

As these changes to foreign investment were likely to become politically sensitive, no records are kept on the number of purchases made by foreigners. This makes understanding what exactly is happening in the market a difficult one.

On the back of such a strong housing market, the RBA has been cranking up the rates in a bid to slow the market down before it makes our current and unprecedented housing bubble a magnitude worse. But will interest rates have any effect to foreign investors using funds sourced outside of Australia? If the market is read wrong, the RBA could be penalising Australians, both the unproductive property market and productive businesses which underpin and create jobs and real value.

In a finance industry conference held in Sydney yesterday, RBA Governor Glenn Stevens said that if the purchase of property by foreigners who borrow abroad becomes “a large-scale phenomenon,” then raising interest rates in Australia wouldn’t “make any difference to them.”

“[The] question of the role of foreign purchases is an important one and it’s one we’re giving some attention to”, adding that hard facts about the trend is difficult to find. The RBA is closely watching foreign investment in our housing market and if it is contributing to the surge in house prices in recent quarters.

The government now has a big problem, both politically and financially. If they can’t seize back control of the housing market, Australian citizens will be forced to accumulate more debt and spend more on housing expenses as a percentage of the household budget at the expense of discretionary spending further impacting local jobs and businesses. Not only will we not be able to afford basic housing, we will have no jobs.

“In an environment where the affordability of housing is very poor, perceptions that foreigners are fueling house prices could become an issue” for the government, said Shane Oliver, senior economist at AMP Capital Investors.

» Chinese buyers underpin housing prices - The Australian, 27th March 2010.

» Home owners blitz the auction market - The Sydney Morning Herald, 27th March 2010.

Official statistics released last Thursday showing sales of existing housing in Beijing falling 38 percent and units falling 64.2 percent in a month has prompted fears that the housing bubble in China may be losing momentum.

Henry Cheng, the Managing Director of New World Development Co, a Hong Kong property developer who develops property in mainland China, said “China’s home prices won’t drop too much, as the government can’t allow prices to plunge because the real estate market is an important pillar of the economy” after Beijing reported falls in prices of 4.6 percent last month. “If too many people lose their money on real estate, it will be bad for the economy; it’s the same rationale in Hong Kong.”

The Chinese Government has been working to contain the bubble, increasing reserve requirement for banks this year after credit growth surged out of control in January. Today, it was reported policy makers has banned banks from lending to developers found to be landbanking or holding back sales to pump up prices.

But while the Central Government is trying to cool the market, State owned enterprises (SOEs) are bidding up prices. Record land prices in Beijing was broken twice on Monday by bids from SOEs.

Wong Siu Kong, chief executive of property developer Kerry Properties Ltd, said “The government’s policies may create volatility in the market, but price drops would be limited this year as the real estate market fundamentals haven’t changed.”

» China’s home prices ‘won’t drop too much’ - China Daily, 18th March 2010.

» New real estate elephants - China Daily, 18th March 2010.

Existing home sales in Beijing fell 38 per cent in February while existing unit sales fell 64.2 percent. The average price of existing homes in Beijing fell 4.6 percent.

Rentals were not immune either. Volume decreased 10 per cent in February resulting in a 7.9 percent decline in rents.

Officials said it was too early to say if the drop in existing sales resulted from measures to cool Beijing’s overheated property market.

» Sales, prices drop on BJ 2nd-hand houses - China Daily, 12th March 2010.

In what could be seen as a splitting image of Australia, young Chinese is struggling to get into a housing market fueled by speculation.

The AFP reports “The boom has been bolstered by easy bank loans, tax breaks and a lower down payment threshold, introduced by the government in the past year to support the real estate sector, a key driver of China’s economic recovery.”

But there are now fears much of the China Government’s 586 billion dollar stimulus package has been spent in asset markets such as housing, only leading to a speculative bubble.

Just like in Australia with the government removing the First Home buyers boost, “Fears that policymakers might withdraw these measures next year to dampen speculation have also triggered a round of what analysts call “panic buying”, further fuelling the price surge and increasing stress for younger Chinese.”

The Chinese Government has reported it plans to squash speculative home purchases. From next year, “individuals selling their homes will only be exempt from paying a 5.5-percent tax after at least five years of ownership, instead of the current two.”

The AFP articles comes a month after a report on Al Jazeera about an empty city call Ordos. The city was built by the government in 5 years and will house 1 million people, the only problem is it’s empty - No one lives there.

It is believed the motivation behind building the city was to support GDP. Most of the homes have been sold to investors, but few have been rented out. The Chinese have never seen a property crash, hence housing is seen as a safe investment, a place to park their cash even though there is no rental income or return. The real Ordos is an old city 30km away. Most residents here plan to move to the new Ordos one day, but at present prices are too high to sustain an economy there.

There are also reports of large commercial office towers which sit empty in other parts of China. Many of the towers which would have little change from a Billion dollars, earns no rent.

Australia is hoping China’s continued GDP growth will support it in years to come.

» Young Chinese groan at skyrocketing property costs - AFP, 13th December 2009.