Print Edition | Whitelist Us | Also visit: DailyWealth
Why China's Real Estate Market Won't Collapse
By Frank Curzio, editor, Phase 1 Investor
What's the one industry you would avoid in China?
Marc Faber: Gold is still cheap
Why he thinks it's a buy today...
Must read: Legendary investor Klarman makes the most bizarre market analogy ever
Says this market is a "Hostess Twinkie" and he's more worried than he's ever been...
This green energy has the potential to power the entire world
"It is an inexhaustible energy source that is nearly emission-free..."
Wednesday, 22 September 2010
September 22, 2010
During my trip to China last month, I met with several portfolio managers and investment analysts. I was looking for small-cap investment ideas with huge upside potential. We heard about several promising sectors, including alternative energy, pollution control, health care, and fertilizers.
But at the end of each conversation, I asked these investment professionals the question above. Without hesitation, every one said real estate was their biggest concern. Most believe China's real estate market will suffer a fate similar to real estate in the U.S. – a 30%-plus decline in the average home price.
---------- Advertisement ----------
A.O.P. returns 18.5% a year
You've probably never heard of the A.O.P.
It's a special asset class that has outperformed every investment on the market that we know of over the last decade... and has produced average, annualized returns of 18.5%. It even beat out gold!
That's why we've recently compiled everything we know about the A.O.P. in this exclusive video...
-------------------------------------
Over the past few years, the average home price in China roughly doubled. That's about the same percentage home prices gained from 2003 through 2006 in many areas across the U.S.
Looking at that huge jump – which was even higher in areas like Beijing and Shanghai – I can see the bearish side. But before you look for ways to short China's real estate market, let's take a look at the bigger picture...
For one, the fact that prices are rising does not make housing or any particular stock expensive. China's economy has grown at an average annual rate of 9.5% over the past 10 years. That's about four times the rate of the U.S. With an economy growing this fast, it should come as no surprise that home prices are surging.
Another point to consider... There is no subprime market in China.
In the U.S., just about anyone who could fog a mirror walked away with a $350,000 mortgage – and a "teaser" interest rate set to explode in a few years. When home prices fell, homeowners walked away from their mortgages and foreclosures skyrocketed. The huge increase in inventory crushed the market. Four years later, U.S. real estate is still struggling to find a bottom.
That won't happen in China. The government requires down payments of 30% for new home buyers. For a second home, the down payment is 50% to 60%. These large down payments will prevent homeowners from walking away from mortgages if the real estate market falls 10% to 20%.
And let's say prices do fall 20%... China's savings rate is over 30%, compared to about 6% in the U.S. In other words, China has plenty of cash to buy real estate on a pullback. That creates a floor of value.
In some of the more heavily populated cities – like Beijing and Shanghai – where home prices are now well above affordability levels, the government is requiring even higher down payments, adding new property taxes, and forcing banks to set aside more deposits as reserves.
Imagine if the U.S. had initiated similar policies in 2005... I'd bet the housing market would be on much better footing today.
As I mentioned earlier, every person I talked to in China believes the housing market is overvalued. In fact, I don't know one person living anywhere who believes China's property market is a buy.
That gives me even more conviction the decline in the industry won't be a sudden freefall. As for those who are predicting a U.S.-type 35% collapse in property prices, I just don't see it.
Good investing,
Frank
Posts
