Earlier we pointed you to Andy Xie’s claim that despite the tightening going on in Beijing, the Chinese real estate bubble would persist due to the actions of local governments.
That’s a good story, but let’s revisit the real bombshell:
Local governments have been using bank loans to resettle residents, and resettlement costs have skyrocketed since those being moved need enough compensation to buy properties at today’s prices. Unless property prices rise considerably, local governments will end up losing money, which they cannot afford. Such resettlements played an important role in supporting demand for property last year. The overwhelming majority of end-user purchases probably came from resettled residents who used their compensation cash for down payments. Resettlement compensation is the biggest transfer of wealth from the government to the household sector since the privatization of low-cost public housing a decade ago.
Not only are prices going through the roof, but, as was the case with the US housing bubble, there are basically no downpayments. Well.. there are, the downpayments are being subsidized with “resettlement” money rather than saved money, which is a big deal.
Yesterday, GMO’s edward Chancellor identified the 10 red flags you need to watch for in China. Put this one on your list. The red flags continue to mount.
And don’t miss Why Shanghai real estate is the most obvious bubble ever >
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