Thursday, December 11, 2014

China Housing Market Customs A Tad Bizarre

Typical upscale housing development in China
As a contractor and being involved in real estate I was thinking about how "draw systems" work. This has to do with how a certain percentage of the cost of construction is shelled out as each stage of construction is completed. I remember hearing years ago how Home Depot was excited about entering and developing the massive market in China because apartments are sold by the developer at the "roughed in" stage with no interior. You might know Home Depot cut and ran after a few years adding to the list of American companies that failed in China. Home Depot has blamed their bad experience on not understanding the Chinese culture. After reading this article you may question both the quality of how well these housing units have been finished and how many may never get done.

In trying to understand the massive housing market that drives much of China's growth it is important to realize that people in China buy apartment units that are only roughed in. This means the buyer is essentially purchasing what we in America would call an "empty shell" or an unfinished apartment. In most cases, apartments are sold with internal walls and electrical outlets in place but everything else, including doors, flooring, and bathroom fixtures will need to be built-out by the owner after purchase. It is understandable this created a great deal of excitement for a company like Home Depot that sells the "rest of the package" in a way that can be a one-stop answer for any home buyer. It cannot be underestimated that most of the money spent on constructing a housing unit is spent in finishing, many people give this little thought.
            
The importance of the housing market in China's economy should not be underestimated, this is where almost 75% of the country's household wealth is stored and it is deeply interwoven with shadow banking. A close look at housing in China and the customs under which deals are completed will give Americans some real surprises. Getting information on this subject is not as easy as we might think in a world where in a blink of the eye we find dozens of articles on America's latest craze, after about an hour of research I found enough to confirm what I thought. The site I received a good deal of information from and found myself returning to was designed to help foreign teachers moving to China to better understand the internal workings of the country, it was last updated in November 2010 and does not appear to have any other agenda.

Unlike property and housing ownership in America and other Western countries, all property in China is simply being leased for a 70-year period. The lease is supposed to renew automatically upon expiration, this might unnerve many buyers that know the Chinese government's relatively new Ministry of Housing and Construction retains full "property prerogatives," meaning that leases can be nullified at any time if the government determines that it needs that property for any reason. In addition, the government is also entirely free to decide how much compensation should be offered for that property in the event the land your apartment happens to be located on is reclaimed by the state. Recent regulations now give residents the right to sue the government if they feel they receive unfair compensation, but they rarely win in court.

Then is the issue of cost, it could be said cheap housing is something you won't find in China. Its housing market is among the most expensive in the world when compared to per capita income. For example, the average price of housing in New York City is around $200 per square foot with an average family income of $72,000 per year. By comparison, the average cost of housing in Shanghai for the year 2007 was nearly $108 a sq. ft. against an average family income of $7,316. Generally speaking, the cost of housing outside of Beijing, Shanghai, and Guangzhou will run anywhere from 1,500 to 5,000 yuan (roughly $20 to $68) a foot depending on location. By American standards apartments are small, no more than 30 percent of all new apartments can be larger than 90 square meters (970 square feet).

There is a big question and much disagreement over the stability of China's housing market. Shortly following the end of the 2008 summer Olympic Games, the housing market in China fell into an unprecedented slump with housing prices dropping as much as 30 percent below pre-game prices (note this was around the time the world was in economic crisis). Aside from this being a very difficult market in which to predict prices, foreigners may only purchase apartments to live in for personal use and not to rent out. Virtually no secondary market exists to sell into if you decide to relocate. When the Chinese seek to buy an apartment, they will not give much consideration to anything but new construction. Most bizarre is the legal protections and real estate standards are not yet well-established. The various procedures and steps Americans take for granted when purchasing a property such as; due diligence, housing inspections, and secure escrow accounts simply do not exist. China is a land where rules affecting value can change with little notice, good luck with that.



  Footnote;  As always comments are welcome and encouraged. This article goes hand in hand with several others on China the link below will take you to one of the most popular.
 http://brucewilds.blogspot.com/2014/03/china-and-great-credit-trap.html



AS A BONUS! Below is the "Unbelievable story of how they sell apartments or should I say houses in China." It is worth the read, a short lead-in is provided to soften the transition.

A week after these people got a number they went to "the lottery."  As soon as we got there, they slapped a VIP sticker on them.  Some were red; some, blue. The entrance was guarded by men in black swat team attire, complete with Nazi styled helmets and dark glasses.  You couldn't get in without the proper paperwork and ID card.  It was a challenge to get all of the people in.

There were 61 groups and 15 buyers in each group, for a total of 915 potential buyers chasing after 600 apartments.  They were in group 25 and were seated according to groups.  There were 3 big screens in front of them.  About every 5 minutes, 15 random numbers were displayed on the big screens.  Group 25 came up a disproportionate number of times, but not their number.  We were lucky 13.  Group 11 only showed up twice while........ (the link to continue can be found below)
      http://www.chinafamilyvisa.com/forum/index.php?showtopic=5710

8 comments:

  1. The reason the Chinese like new houses is because they believe old ones contain the spirits of somebody else's ancestors. The unfinished sale is nothing unusual either. I once spent a freezing December night in a Shanghai flat where the external walls still had gaps waiting for the air con units waiting to be fitted.

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  2. Thanks for your comment. The draw system in America is a constant annoyance to contractors who build and then turn to a bank or mortgage company to be paid for completed work. As we know without this system the incentive to properly finish a project is greatly diminished.

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  3. Chinese real estate speculators have shifted their focus, after capitalizing themselves in the China markets, into overseas real estate holdings now. In cities like Vancouver and Toronto it's Chinese buyers that account for the majority of insanely overpriced (by Canadian standards) housing prices effectively creating housing value bubbles overseas.

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    Replies
    1. Sydney has 90,000 unoccupied dwellings according to today's news.
      A lot of them are deliberately empty as o/s buyers are not fussed by it, the Chinese in particular. But it exacerbates Sydney's housing shortage and locals are, like their counterparts in Vancouver, unhappy about it.

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  4. I agree with about everything the Author says, except there being no market for second hand houses. Here he just doesn't know what he's talking about. I've been living in China for quite a few yrs now. And over the yrs I have sold 2 houses and both times they were sold in less than a week after being put on the market. Very easy to sell a used home here. Like I say though, I agree with everything else, and yes, virtually ALL new homes sold are just a concrete shell, nothing more.

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  5. I should of said existing homes take a far distant backseat to the new housing market. Logically that is because many are utilized and lived in rather than objects of speculation.

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