The latest news out of China is bearish. However, you have to be very careful of how you interpret the numbers. Those who want to present the bullish view will give you sales or price numbers for real estate for the first half or the last year. That disguises the plunge in sales since April.

For example, the year-over-years sales increase in China property prices is 11.4%. However, sales since April have plunged. Prices are always slow to follow initially, as speculators refuse to sell at prices lower than the peak price. They hope prices will come back. So, sales plunge. Condo sales in Beijing are down about 90% since April. Officially, sales in Shanghai, Nanjing and Hangzhou in the first half of the year were down 50%. The unofficial numbers should be worse.

Land prices in 103 cities for the first half were down 9%. Imagine! That includes the last part of the price surge in early 2010.

Economists in China now say that the government will stop tightening measures when prices have dropped 20-30%. That’s just what Japan said in 1990. At that time, I wrote that when bureaucrats aim for a 30% decline, they will get a decline of 50% or more, namely a disaster. Actually they got a 70% decline in real estate values over the past 20 years.

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The chief economist for Nomura Securities (NMR) (a Japanese firm) in China says: “I believe such a price fall will have limited impact on China’s economy.” He may have said the same thing in Japan in 1990.

In China, car sales, which had been booming early this year, dropped a hefty 5.25% from May to June. In May, the year-over-year sales rise was 29.8% in May. China Daily reports that a leading Nissan dealer said that sales in June plunged 50% or more from the prior month. Sales people have nothing to do.

On August 2, The HSBC China Manufacturing Purchasing Managers Index was released, showing a decline to 49.4 from 50.4 in June. Anything below 50 shows contraction.?? This is the first time below 50 since the bottom of the last serious economic plunge in March 2009.

All the above confirms what we have been forecasting for several months: Government efforts to stop real estate inflation is resulting in the bursting of a huge speculative real estate bubble. If you want to know how it will work out, just go to Las Vegas or Miami.

The normal rule is that banks and housing finance companies easily provide NRI home loans up-to 85% of the cost of the residential property. However, the upper limit of the loan amount sanctioned and the down payment will depend on various factors and can also vary from lender to lender.

For example if you take a NRI housing loan for purchase, construction, extension or renovation of a new house or flat from ICICI Bank, it will happily finance 85% of the total cost of the property. However, if you take a NRI home loan for purchase of a plot of land for residential use, the maximum amount of home loan financed will be 75% of the total cost of the property.

Again there are special schemes offered by banks, which break all the rules, like the one from Citibank, which provides a NRI home loan up to 89% of the property value if the loan value is less than or equal to Rs. 50 lakhs.

Here is a roundup of the maximum and minimum loan amounts offered by various banks for their NRI home loans:

Minimum loan amount
SBI offers a NRI Home Loan for a minimum of Rs. 3 lakhs ICICI Bank gives a NRI home loan for a minimum of Rs 5 lakh. ICICI bank offers a minimum of Rs. 10 Lakh for loan against property Citibank offers a NRI home loan for a minimum of Rs. 2.1 lakhs

Maximum loan amount
SBI offers a NRI housing loan for a maximum of 60 times NMI ( Net Monthly Income) or 5 times NAI (Net Annual Income) for applicants below 45 years of age and 48 times NMI or 4 times NAI for applicants above 45 years of age SBI special maximum loan amount terms:
Maximum loan amount for repairs and renovation: Rs.10 lacs Maximum loan amount for purchase of plot for construction of house : Rs.20 lacs Aggregate repayment obligations should not exceed 50% of NMI or NAI
ICICI Bank gives a NRI home loan for a maximum amount of Rs. 1 crore. Citibank provides a NRI home loan for a maximum of Rs. 5 crore. This amount is available for a loan of 15 years tenure. The maximum amount for 20 year NRI home loan from Citibank is Rs. 1 crore.

As per a circular issued by the RBI on 31st January, 2007, if the loan is against the NRI’s NRE and FCNR accounts, the maximum loan amount cannot exceed Rs. 20 lakhs.

Blowing Bubbles
I watched an interesting interview with Jim Chanos on the Chinese Property Bubble. Jim Chanos is an American hedge fund manager of Kynikos Associates, a New York investment company that is focussed on short-selling (profiting from the fall in the value of an asset).

Mr Chanos rose to fame in 2000-01 when he identified flaws in Enron Corporation’s accounts, resulting in management significantly overstating the company’s earnings. Chanos began short selling Enron and made massive profits as the company’s stock declined from $90 in August 2000 to a low of nearly $1 near the end of 2001. Chanos’ ability to find and then exploit the fraud at Enron has made him somewhat of a celebrity in the financial press.

In his latest interview, Chanos warns that China is experiencing a severe real estate bubble and is headed for a crash; rather than the sustained boom that most mainstream economists predict.

Chanos first defines what he means by a bubble: a debt fuelled asset inflation where the rental income does not cover the debt expense incurred to purchase the asset. In other words, “Ponzi finance” that requires the “greater fool” and ever-increasing levels of debt to perpetuate it.

After watching Chanos – interview, I thought I’d examine how Australia’s residential housing market stacks up under his definition in order to determine whether we are experiencing a speculative housing bubble or asset inflation based upon sound fundamentals.

Up, Up and Away:
Anyone under the age of 40 and living in an Australian capital city knows first hand that it is becoming increasing difficult to find a decent, reasonably priced home within a reasonable commute to work. We’ve all watched in amazement, disbelief or dread as we, our friends or family are priced-out of the housing market or take on mortgages the size of a small African nation simply to put a roof over our head. But how expensive have Australian house prices become? Where has the money come from? And is this house price growth sustainable?

To answer the first question, Chart 1 plots average Australian established house prices (sourced from the Real Estate Institute of Australia) against average Household Disposable Incomes (HDI) and Average Full-Time Ordinary Earnings (AFTOE).

As you can see, the ratio of house prices to average earnings started at around 2.5 times HDI and 3.7 times AFTOE in 1986. This ratio increased slowly from the mid-1980s to 2000, rose rapidly from 2000 to around 2004 and then settled at around 6 times HDI and 7.7 timed AFTOE in 2008/09.

While you can argue about the choice of house price data and income measures, the fact remains that the trend in prices is clear – housing has become far more expensive overtime and Australians are now required to dedicate a much larger proportion of their lifetime’s earnings to purchase a home.

Buy now, pay later:
Since the growth in house prices has significantly outpaced the growth in incomes, it follows that rising debt levels have been the key contributor to rising house prices in Australia, since the only way to purchase something that you cannot afford through income is to borrow the difference. Chart 2 uses RBA data to plot the level of mortgage debt against HDI and GDP.

As with Chart 1, Australian mortgage debt has increased significantly from around 32 per cent of HDI and 12 per cent of GDP in 1990 to 138 per cent and 89 per cent respectively at the end of 2009.

Based on the above data, we can confidently conclude that Australia’s house price growth has been debt-fuelled, thereby fulfilling the first criterion of Chanos bubble definition.

If you can’t buy it, rent it:
So what about the second part to Chanos ” bubble definition ” the requirement that the rental income does not cover the debt expense incurred to purchase the asset, thereby requiring “Ponzi finance” and ever-increasing levels of debt to sustain asset (house price) growth?

To determine whether this part of Chanos – definition has been met, Chart 3 uses ABS data to plot the growth in real (inflation-adjusted) house prices against the growth in real rents. For this criterion not to hold, we would require rents to have increased at roughly the same rate as house prices such that rental incomes broadly cover the cost of debt repayments.

Ouch! According to the ABS, real rents have increased by only 14 per cent since 1987 while real house prices have risen by a whopping 163 per cent over the same period! It is no surprise then that yields on rental houses have plummeted from around 8 per cent in 1987 to around 3.5 per cent currently.

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There is no doubt that the U.S. real estate and mortgage problems of 2006 into 2010 have disturbed markets around the world. Many countries have suffered, with previously robust real estate markets languishing without international investment due…

Investor Attention on Goa for India Real Estate Investment

There is no doubt that the U.S. real estate and mortgage problems of 2006 into 2010 have disturbed markets around the world. Many countries have suffered, with previously robust real estate markets languishing without international investment due to current conservative attitudes. India is no exception, with residential and commercial real estate development in India slowing during the last three years.

However, international investment may be experiencing renewed interest in the country, and India itself is continuing and expanding government initiatives through housing boards situated throughout this nation of more than one billion population. Being one of the most populated countries in the world, housing is at the top of the government’s list of importance for their citizens.

However, when it comes to interest from foreign investors, tourism plays an important part. Goa, India’s smallest state, is also the fourth smallest state in population. Situated on India’s west coast in the Konkan region, it’s the richest state, with a GDP more than double that of the country as a whole. Both domestic and international tourists flock to Goa for its beaches and architecture influenced by the Portuguese. Wildlife sanctuaries, equatorial forests and beautiful beaches draw tourists, and now real estate investors and developers. With the government owning more than 80% of the forest land, greater land demand should bring upward pressure on prices for future development.

Tourists bring money, not only for temporary enjoyment, but for long term real estate purchases. Tourism is Goa’s primary industry, handling approximately 12% of all of India’s tourist visits. Goa isn’t overly dependent on tourism, as the primarily agricultural area is changing to a more mining focus, with growing discovery of locations rich in minerals and ores. But, tourism is very important when considering real estate investment, as those who return to the area will many times look for a purchase that will appreciate while providing an annual vacation retreat.

Builders and developers in Goa frequently also handle property brokerage. One developer, Riviera Constructions, boasts project completions in 12 to 15 months, well ahead of schedules. These include apartments and India vacation villas, as well as planned resort communities built with international investment as a focus. While sale is the primary goal, they also manage these properties as rentals, and buyers can factor short term rental income into their purchase decisions.

For those vacationers who enjoy pristine beaches and access to equatorial forests, wildlife and the civility of beautiful architecture, restaurants and a focus on tourism, Goa is a great destination. It also seems that it could be a great place to invest in real estate.

Strong buying interest was witnessed in Japan and Singapore in the first half of 2007, with the collective investment amount in large-lot deals in the two countries accounting for over half of the regional total. The buying spree by international institutions and REITs continued as they remained active throughout the region. The combined value of the quarter’s ten largest investment deals amounted to US$6.9 billion, with the acquisition of a portfolio of industrial properties by Secured Capital Japan and DLJ Real Estate Capital Partners at a price over JPY 160 billion topping the list.

Japan has recorded nine consecutive quarters of economic expansion, and recorded an annualized real growth rate of 3.3 per cent during the first quarter of 2007, with the major boost coming from robust corporate capital investment. Investors remained overwhelmingly positive regarding the Japanese real estate market and most real estate indicators point to a continued upbeat market. J-REITs remained the dominant players as they added to their portfolios not only in Tokyo but throughout the country. Nevertheless, with the financial markets pricing a further interest rate increase, the 10-year JGB yield increased from a 1.6 per cent average in April to a 1.9 per cent average in June, shrinking the positive spread of NOI yields.

In Singapore, investment transactions totalling S$24.63 billion were recorded in the first half of 2007, a 70 per cent increase year on year. The robust momentum was largely driven by acquisitions of development sites. The office investment market remained brisk, with both the number and value of transactions by overseas investors increasing as private equity groups and foreign funds displayed keen interest in office properties. In the most significant office transaction in the first half of 2007, MCP Raffle, a unit of Macquarie Global Property Advisors, purchased Temasek Tower for S$1.04 billion.

Investors remained confident in the Hong Kong property market on the back of the city’s continued economic growth and upbeat economic outlook. Investment activities were particularly robust in the luxury residential and office sectors, with premium properties highly sought after by both investors and end-users. Notable transactions included the en bloc acquisition of Lodge on the Park in Mid-Levels for HK$1.0 billion by a local developer and Citigroup Property Investors’ purchase of two Central buildings, Crocodile House and the adjacent Ananda Tower, for a combined HK$1.5 billion.

Strong demand in Seoul’s office sector continued to drive positive investment momentum during the first half of 2007, with the steady increase in capital values of prime office buildings attracting both domestic and foreign investors. MAPs Investment Management was particularly aggressive, settling a forward transaction by purchasing Glostar Square Garden, due to be completed in 2010 in the CBD, for KRW 843 billion. Another active domestic investor, KORAMCO, will close the acquisition of Seoul City Tower in July, adding the CBD property to the portfolio of its KOCREF NPS 1 K-REIT.

The Chinese government continued to step up efforts to control real estate investment in the first half of 2007 in order to maintain market stability and avoid overheating in the economy. Between January and June the People’s Bank of China raised the bank deposit reserve ratio five times, from 9 to 11.5 per cent, effectively removing liquidity from the market. The Bank also twice increased the benchmark rates of bank loans and deposits.

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Residential property prices in China rose by a record 12.8% in April from a year earlier, defying government measures to stem gains and cool speculation in the real estate market. The latest figures from the National Bureau of Statistics showed the increase topped an 11.7% jump in March that was the highest since the survey of residential and commercial prices in 70 cities started in 2005.

China has already restricted pre-sales by developers, curbed loans for third home purchases and raised banks- minimum reserve requirements three times this year but none of these measures is affecting the property market at present although analysts believe they will kick in soon.

The government is trying to peel back the effects of a stimulus plan and $1.4 trillion lending binge that revived economic growth but may have now created a real estate bubble.

It may be just a matter of time, according to Brian Jackson, an emerging market strategist at the Royal Bank of Canada in Hong Kong. “The latest round of these fine tuning measures were only put in place a few weeks ago, so it is probably too soon to judge their effectiveness” he explained.

But most experts agree that more needs to be done. Developers including Guangzhou R&F Properties and China Overseas Land & Investment have already reported slowing sales in April and analysts believe that prices will start falling in 2010.

Beijing became the first Chinese city to limit residents to purchasing one new home starting this month and more cities are likely to restrict buying, according to Yang Qingli, an analyst at BOCOM International. “Prices will definitely drop this year, by between 10 and 20%” he predicted.

Prices could fall by more than 30% in the first-tier cities as supply is set to rise, according to Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia. “This is the last month this year we see surging prices” he confidently predicted.

R&F, the biggest real estate company in the southern city of Guangzhou, said that contracted sales last month slowed because of China’s fiscal tightening. Sales by value at China Overseas fell 9.2% in April from a year earlier, the company said.

Evergrande Real Estate Group, China’s second-biggest developer by sales, said sales fell 10% last month, the biggest decline for six months and it has cut prices by 15% on 40 developments.

“The new measures will surely kick in soon, but it is likely more restrictions will be announced until Beijing can see clear evidence that prices will drop too, not just transactions volumes, and that can still take a few more months” said Andy Mantel, Hong Kong based managing director at Pacific Sun Investment Management.

But if developers need funds all they do is seek less tight credit terms offshore, it is claimed.

China Overseas Land & Investment agreed to an HK$8 billion loan in February that pays 1.45% at current market levels. “For property developers to keep growing in what is an extremely fragmented and competitive market, they have to go offshore for funds. It’s one way to circumvent tight onshore credit” explained Brayan Lai, a credit analyst at Credit Agricole CIB in Hong Kong.

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