China home prices soar

[a2784]

Out of curiosity I do look at housing prices as well as rental rates in a few areas in China. And I have noticed that the rental rates are extremely low compared to values. You are probably spot on with the return figures you mentioned. But what I cannot figure out is why. Is this simply a supply/demand equilibrium situation? And if so, would that not suggest an extremely scary amount of speculation in the real estate market, even more so than perhaps even some 'china real-estate bubble alarmists' believe?

 

What say you?

 

Your observation is correct. A lot of it is due to low occupancy rates that many Chinese people say hovers around 60% to 70%. It's also due to the fact that people simply cannot afford or do not want to pay what you'd expect rent would be. They'd rather buy the place.

 

Two current examples:

 

One of the most popular residential areas in Guangzhou where you can buy a new house for about 13k RMB per square meter -- 130 square meter flats rent on average for 3,500 RMB.

 

In Beijing, on the 2nd Ring Road, one of the most desireable residential areas has homes for sale at about 25k RMB per square meter. Last year, when property prices were strong, a 200 m2 flat was renting for about 10k. From about the last 4 months until even now 7,500 RMB per month is fine. 130 m2 flats are renting at about about 5k.

 

Would you buy a 4 - 5 million RMB flat to rent out at 7,500 RMB per month? 15% or more of that 7,500 RMB is automatically eaten up in taxes when you provide a rental receipt (fa piao) to the tenant.

My experience in Shenzhen is also the same regarding low rent prices compared to apartment purchase price.

 

However in Qingdao in the CBD area is is difference. The rental prices are the same as Futian area in Shenzhen. Also they appear to be even more than in Beijing. For instance a 75 m2 apartment is ~5000 RMB/month in the CBD area close to Hong Kong Road. In addition it is common here for the renter to have to pay the rental receipt if they require. The renter also has to pay all the real estate agents fees and the rent is due in one upfront payment. I thought this was common to all of northern China but maybe it is only in Shandong.

[GDBILL]

Out of curiosity I do look at housing prices as well as rental rates in a few areas in China. And I have noticed that the rental rates are extremely low compared to values. You are probably spot on with the return figures you mentioned. But what I cannot figure out is why. Is this simply a supply/demand equilibrium situation? And if so, would that not suggest an extremely scary amount of speculation in the real estate market, even more so than perhaps even some 'china real-estate bubble alarmists' believe?

 

What say you?

 

Your observation is correct. A lot of it is due to low occupancy rates that many Chinese people say hovers around 60% to 70%. It's also due to the fact that people simply cannot afford or do not want to pay what you'd expect rent would be. They'd rather buy the place.

 

Two current examples:

 

One of the most popular residential areas in Guangzhou where you can buy a new house for about 13k RMB per square meter -- 130 square meter flats rent on average for 3,500 RMB.

 

In Beijing, on the 2nd Ring Road, one of the most desireable residential areas has homes for sale at about 25k RMB per square meter. Last year, when property prices were strong, a 200 m2 flat was renting for about 10k. From about the last 4 months until even now 7,500 RMB per month is fine. 130 m2 flats are renting at about about 5k.

 

Would you buy a 4 - 5 million RMB flat to rent out at 7,500 RMB per month? 15% or more of that 7,500 RMB is automatically eaten up in taxes when you provide a rental receipt (fa piao) to the tenant.

My experience in Shenzhen is also the same regarding low rent prices compared to apartment purchase price.

 

However in Qingdao in the CBD area is is difference. The rental prices are the same as Futian area in Shenzhen. Also they appear to be even more than in Beijing. For instance a 75 m2 apartment is ~5000 RMB/month in the CBD area close to Hong Kong Road. In addition it is common here for the renter to have to pay the rental receipt if they require. The renter also has to pay all the real estate agents fees and the rent is due in one upfront payment. I thought this was common to all of northern China but maybe it is only in Shandong.

 

In many other places it is common (and understandable) for tenents to pay any fees involved in getting a receipt (fa piao), paying all the agent's fees and paying all rent upfront does suck. Generally in Beijing, Guangzhou and Shanghai the owner pays 1/2 and the seller 1/2 of the agent fees unless negotiated differently.

 

Personally, having a tenant pay upfront the whole year's rent is pretty good. I generally encourage quarterly, but if someone is open to yearly then you won't catch me complaining.

[GDBILL]

Most Chinese people don't get mortgages. They pay cash for the complete price of their home. This includes young and old alike.

 

This is actually not true. 80% get mortgages and only about 20% pay cash. The claim that young people are finding it hard to have roof over their head is also not true.

Although housing prices have gone up quite a bit, rental has not. The rental return is about 3-4% in most cities and as low as 2% in cities with high housing prices. People can rent.

 

It can be real comedy here sometimes as to where people are getting their figures when they make statements. I would consider it very likely that many Chinese young, and real estate investors are opting to go the mortgage route, in lieu of years past where predominately cash was paid in full. It would be very difficult to validate any figures, as I don't know that they are published in China.

 

That culture of remaining debt free is alive and well. There are dangers in financing a home in China. Many of my co-workers have opted to get a loan, and had to come up with the standard 50% of the total value when submitting the application to the bank. The danger here is, that if you don't get approved, and it does happen, that you lose that 50% down fee. Therefore, unless you have a very stable income and history, it is still safer to pay the total in cash.

Also, don't forget that most Chinese live in rural areas where everything is different.

 

Simply false.

 

For first time home buyers 30% is the most you need to put down on a new home. For used homes it can be as low as 40% depending on the appraisal value and age of the property. Tops -- absolute tops -- is 50%.

 

When purchasing a home from a developer, the standard down payment is 20% and there is a standard clause that the purchase agreement is contingent on bank approval. If the bank does not approve the mortgage, you get your money back, period. Once the mortgage is approved, you come up with the other 10% remaining. Many times you can even do it 10 + 20.

 

When purchasing a used home, you'd be really stupid to give the current owner anything other than a minimal deposit while going through the mortgage formalities. You could use an escrow service provided by real estate agents, but that is probably even riskier.

 

Even for expats, getting a mortgage in China is one of the least stressful banking experiences you'll have. It is nothing at all like the mortgage circus you go through when buying a home in the States. If you have an income sufficient -- according to bank calculations -- to safely pay the mortgage and you have no adverse credit history, your mortgage is approved. Generally the bank wants verification that you earn approximately double your mortgage payment. It really is that easy.

 

That your friends have had problems says more about the quality of your friends than how the mortgage process works.

I seem to recall that before the housing bubble and crisis getting a mortgage was quite a breeze for people in the US even if they did not have sufficient income and bad credit.

 

It will probaby be tougher to get a China property mortgage in future if (when) the bubble bursts.

 

 

They say that getting a mortgage now in the States is a real pain in the neck. Not sure what it was like during the lead up to the current economic fiasco, but when I bought my place a long, long time ago it was rather easy. If you were willing to put 10% down, Bank of America would pretty much kiss your a$$ -- not even doing a credit check.

 

I'm not sure how the mortgage process would change if there were a bubble in China. Perhaps they would raise the minimum downpayment or raise the income to mortgage requirement. I am kind of surprised that banks in China don't even look at your debt to income ratio. Maybe they'd start taking that into consideration, too.

[Tony_onrock]

Most Chinese people don't get mortgages. They pay cash for the complete price of their home. This includes young and old alike.

 

This is actually not true. 80% get mortgages and only about 20% pay cash. The claim that young people are finding it hard to have roof over their head is also not true.

Although housing prices have gone up quite a bit, rental has not. The rental return is about 3-4% in most cities and as low as 2% in cities with high housing prices. People can rent.

 

It can be real comedy here sometimes as to where people are getting their figures when they make statements. I would consider it very likely that many Chinese young, and real estate investors are opting to go the mortgage route, in lieu of years past where predominately cash was paid in full. It would be very difficult to validate any figures, as I don't know that they are published in China.

 

That culture of remaining debt free is alive and well. There are dangers in financing a home in China. Many of my co-workers have opted to get a loan, and had to come up with the standard 50% of the total value when submitting the application to the bank. The danger here is, that if you don't get approved, and it does happen, that you lose that 50% down fee. Therefore, unless you have a very stable income and history, it is still safer to pay the total in cash.

 

Also, don't forget that most Chinese live in rural areas where everything is different.

well, I have to admit that I did not look at the overall figures published by any research group. I base the 80% mortgage number on our own experience.

We have 2 residential developments in Guangzhou that are selling, one development in Chengdu that is selling, two huge develoment projects in 2nd and third tier cities in Jiangsu selling and one not yet reached pre-sale stage. If you add the total it is over 4 million sq. meters of development and actually have sold over thousands of apartments. We watch the cash flow daily. In our projects, about 80% get mortgages on average. We get a weekly report of how many units sold and how much cash came back, including a break down of cash purchase and bank loan draw down.

[a2784]

Most Chinese people don't get mortgages. They pay cash for the complete price of their home. This includes young and old alike.

 

This is actually not true. 80% get mortgages and only about 20% pay cash. The claim that young people are finding it hard to have roof over their head is also not true.

Although housing prices have gone up quite a bit, rental has not. The rental return is about 3-4% in most cities and as low as 2% in cities with high housing prices. People can rent.

 

It can be real comedy here sometimes as to where people are getting their figures when they make statements. I would consider it very likely that many Chinese young, and real estate investors are opting to go the mortgage route, in lieu of years past where predominately cash was paid in full. It would be very difficult to validate any figures, as I don't know that they are published in China.

 

That culture of remaining debt free is alive and well. There are dangers in financing a home in China. Many of my co-workers have opted to get a loan, and had to come up with the standard 50% of the total value when submitting the application to the bank. The danger here is, that if you don't get approved, and it does happen, that you lose that 50% down fee. Therefore, unless you have a very stable income and history, it is still safer to pay the total in cash.

 

Also, don't forget that most Chinese live in rural areas where everything is different.

well, I have to admit that I did not look at the overall figures published by any research group. I base the 80% mortgage number on our own experience.

We have 2 residential developments in Guangzhou that are selling, one development in Chengdu that is selling, two huge develoment projects in 2nd and third tier cities in Jiangsu selling and one not yet reached pre-sale stage. If you add the total it is over 4 million sq. meters of development and actually have sold over thousands of apartments. We watch the cash flow daily. In our projects, about 80% get mortgages on average. We get a weekly report of how many units sold and how much cash came back, including a break down of cash purchase and bank loan draw down.

In your company's experience what is the average percentage of the down payment when one gets a bank loan?

[Tony_onrock]

The down payment ranges from 20% to 50%. Small units (90 sm and below), others 30%, second apartment 40% and villas usu. 50%. Income verification is, well, pretty much determined by access to your company's chop.

The low rental yield is due to the high housing prices, which was pushed up by actual and expected appreciation of the property value. Commercial property, retail, office and hotels are a bit different, but each a different animal. Office rental is quite straight forward but the yield is still low compared to developed countries. Retail, whether shopping mall or department store, are all run in a department store manner, more or less, with turn over rent playing a large part. Hotel really depends on occupancy and operation. It is labor intensive, takes 9-12 months to reach break even. Personally I like serviced apartment better, esp. where there is ability to do daily rental.

there is a real bubble in some cities (San Ya for sure will crash soon). when it pops it will drag down some of the second and third tier cities but it will soon rebound. With land price at a few hundred bucks RMB, one can afford to wait.

[Guest Tony n Terrific]

China housing values is in the Cat Brid seat now. Here in the US housing prices are in the doldrums. The prediction here in the US that housing prices will drop another 6% the next 2 years with Miami, Florida dropping a wopping 29%.

[Stone]

Tony_Onrock: many (I think at least half of) apartments within the Beijing 3rd ring are selling above 1 million RMB. Who are those typical buyers for those apartments? Do you have to earn at least 150-200K RMB a year to buy those apartments? Or most of the buyers are investors who are speculating on price appreciation?

Edited February 25, 2010 by Stone (see edit history)

[GDBILL]

Tony_Onrock: many (I think at least half of) apartments within the Beijing 3rd ring are selling above 1 million RMB. Who are those typical buyers for those apartments? Do you have to earn at least 150-200K RMB a year to buy those apartments? Or most of the buyers are investors who are speculating on price appreciation?

 

About 15 - 20k per square meter is average. On a one million RMB mortgage, the monthly payment is about 6,000 RMB per month for 30 years. That's within reach of your two-income household earning a bit above average incomes. banks here usually only require your monthly payment to be less than 50% of your monthly income.

[Stone]

Tony_Onrock: many (I think at least half of) apartments within the Beijing 3rd ring are selling above 1 million RMB. Who are those typical buyers for those apartments? Do you have to earn at least 150-200K RMB a year to buy those apartments? Or most of the buyers are investors who are speculating on price appreciation?

 

About 15 - 20k per square meter is average. On a one million RMB mortgage, the monthly payment is about 6,000 RMB per month for 30 years. That's within reach of your two-income household earning a bit above average incomes. banks here usually only require your monthly payment to be less than 50% of your monthly income.

 

Interesting. I am wondering what percentage of Beijing housholds who are currently earning over 150K RMB a year to qualify for the 1 million RMB mortgage (I mean, if we do not include those migrant workers who never intend to settle in Beijing).

[Tony_onrock]

Stone: I get asked the same questions by some of our investors as well. How can they afford to pay for these apartments given the income level? How do they qualify for the bank loan?

Here is how they do it:

After they decide to buy and agreed on a price, etc. a young couple would first come up with the down payment. The guy asks his mom and dad, the girl ask her mom and dad (other than in Shanghai, typically) to pool together the down payment, at least the bulk of it and they themselves put some money in too. Then they go to the personnel department and ask for a income verification letter to be chopped. They take this letter, the draft of which is typically prepared by the agent or at least a draft reviewed by the agent, to the bank and get a loan. How the hell they pay the monthly mortgage is another matter. It is typically a struggle.

We don't have development projects in Beijing. So I don't have a breakdown of investment purchase versus self use. Nor did I have numbers on the average income. There were rumors at one point in time that we were going to trata title sell one of our properties, between 2nd and 3rd ring at 38,000 /sm with GFA ranging from 180 to 300 sm. I got a call from my cousin asking to reserve one for her and calls from the lending bank to reserve one for them. I know my cousin's income, but not how much these state owned bank employees make. I guess their salary would be around 200K per year with a year end bonus (cash and gift cards, etc of a little over a million RMB). In Beijing there are more than a few douzen (thousands?) government employees/public servants and they would treat it as a real insult if you ask them if they make more than 200k RMB a year. The factory workers and the office front desk ladies don't buy.

[GDBILL]

Stone: I get asked the same questions by some of our investors as well. How can they afford to pay for these apartments given the income level? How do they qualify for the bank loan?

Here is how they do it:

After they decide to buy and agreed on a price, etc. a young couple would first come up with the down payment. The guy asks his mom and dad, the girl ask her mom and dad (other than in Shanghai, typically) to pool together the down payment, at least the bulk of it and they themselves put some money in too. Then they go to the personnel department and ask for a income verification letter to be chopped. They take this letter, the draft of which is typically prepared by the agent or at least a draft reviewed by the agent, to the bank and get a loan. How the hell they pay the monthly mortgage is another matter. It is typically a struggle.

We don't have development projects in Beijing. So I don't have a breakdown of investment purchase versus self use. Nor did I have numbers on the average income. There were rumors at one point in time that we were going to trata title sell one of our properties, between 2nd and 3rd ring at 38,000 /sm with GFA ranging from 180 to 300 sm. I got a call from my cousin asking to reserve one for her and calls from the lending bank to reserve one for them. I know my cousin's income, but not how much these state owned bank employees make. I guess their salary would be around 200K per year with a year end bonus (cash and gift cards, etc of a little over a million RMB). In Beijing there are more than a few douzen (thousands?) government employees/public servants and they would treat it as a real insult if you ask them if they make more than 200k RMB a year. The factory workers and the office front desk ladies don't buy.

 

You should know better than that. No government employee legally earns 200k per year. Cabinet level officials (i.e. ministers) have a net salary of about 6 - 7k.

 

When you say state-owned bank it can be confusing because in one way or another the government owns every bank in China with the exception of those like HSBC, perhaps. If you mean employees of the traditional Big Four, there is no way anybody except for, perhaps, the very senior management to legally earn 200k per year. It would be a miracle if a branch manager or even an area branch manager took home 7k per month.

 

The typical bonus for any of these people is a 13th month salary.

[ShaQuaNew]

Stone: I get asked the same questions by some of our investors as well. How can they afford to pay for these apartments given the income level? How do they qualify for the bank loan?

Here is how they do it:

After they decide to buy and agreed on a price, etc. a young couple would first come up with the down payment. The guy asks his mom and dad, the girl ask her mom and dad (other than in Shanghai, typically) to pool together the down payment, at least the bulk of it and they themselves put some money in too. Then they go to the personnel department and ask for a income verification letter to be chopped. They take this letter, the draft of which is typically prepared by the agent or at least a draft reviewed by the agent, to the bank and get a loan. How the hell they pay the monthly mortgage is another matter. It is typically a struggle.

We don't have development projects in Beijing. So I don't have a breakdown of investment purchase versus self use. Nor did I have numbers on the average income. There were rumors at one point in time that we were going to trata title sell one of our properties, between 2nd and 3rd ring at 38,000 /sm with GFA ranging from 180 to 300 sm. I got a call from my cousin asking to reserve one for her and calls from the lending bank to reserve one for them. I know my cousin's income, but not how much these state owned bank employees make. I guess their salary would be around 200K per year with a year end bonus (cash and gift cards, etc of a little over a million RMB). In Beijing there are more than a few douzen (thousands?) government employees/public servants and they would treat it as a real insult if you ask them if they make more than 200k RMB a year. The factory workers and the office front desk ladies don't buy.

 

You should know better than that. No government employee legally earns 200k per year. Cabinet level officials (i.e. ministers) have a net salary of about 6 - 7k.

 

When you say state-owned bank it can be confusing because in one way or another the government owns every bank in China with the exception of those like HSBC, perhaps. If you mean employees of the traditional Big Four, there is no way anybody except for, perhaps, the very senior management to legally earn 200k per year. It would be a miracle if a branch manager or even an area branch manager took home 7k per month.

 

The typical bonus for any of these people is a 13th month salary.

 

I can echo Bill's point as the government workers in China are low-paid when compared with those who work in the private sector. They often receive a few other benefits though like housing and a lifetime pension.

[GDBILL]

Tony_Onrock: many (I think at least half of) apartments within the Beijing 3rd ring are selling above 1 million RMB. Who are those typical buyers for those apartments? Do you have to earn at least 150-200K RMB a year to buy those apartments? Or most of the buyers are investors who are speculating on price appreciation?

 

About 15 - 20k per square meter is average. On a one million RMB mortgage, the monthly payment is about 6,000 RMB per month for 30 years. That's within reach of your two-income household earning a bit above average incomes. banks here usually only require your monthly payment to be less than 50% of your monthly income.

 

Interesting. I am wondering what percentage of Beijing housholds who are currently earning over 150K RMB a year to qualify for the 1 million RMB mortgage (I mean, if we do not include those migrant workers who never intend to settle in Beijing).

 

On a net one million RMB 30-year mortgage, the monthly payment is slightly under 6,000 RMB. Anybody with a gross family income of 144k could qualify for that mortgage provided they were not on the People's Bank of China blacklist for defaulting on previous credit obligations.

 

150k places each member of the family (i.e. husband and wife) at a monthly salary of about 6,300 RMB. Unless employed by one of our JVs, virtually everybody in my company earns more than that. New hires at P&G earn about 6,500 RMB. For companies -- usually foreign invested -- that report to Mercer, 6,300 would be below average for their average employee.

 

They report that the average salary in Beijing is approximately 3,500 RMB per month. My guestimate would be at least 25% of the population has a combined family income of 150k or more. It might even be as high as 40%, but I wouldn't think it any higher.

[GDBILL]

Stone: I get asked the same questions by some of our investors as well. How can they afford to pay for these apartments given the income level? How do they qualify for the bank loan?

Here is how they do it:

After they decide to buy and agreed on a price, etc. a young couple would first come up with the down payment. The guy asks his mom and dad, the girl ask her mom and dad (other than in Shanghai, typically) to pool together the down payment, at least the bulk of it and they themselves put some money in too. Then they go to the personnel department and ask for a income verification letter to be chopped. They take this letter, the draft of which is typically prepared by the agent or at least a draft reviewed by the agent, to the bank and get a loan. How the hell they pay the monthly mortgage is another matter. It is typically a struggle.

We don't have development projects in Beijing. So I don't have a breakdown of investment purchase versus self use. Nor did I have numbers on the average income. There were rumors at one point in time that we were going to trata title sell one of our properties, between 2nd and 3rd ring at 38,000 /sm with GFA ranging from 180 to 300 sm. I got a call from my cousin asking to reserve one for her and calls from the lending bank to reserve one for them. I know my cousin's income, but not how much these state owned bank employees make. I guess their salary would be around 200K per year with a year end bonus (cash and gift cards, etc of a little over a million RMB). In Beijing there are more than a few douzen (thousands?) government employees/public servants and they would treat it as a real insult if you ask them if they make more than 200k RMB a year. The factory workers and the office front desk ladies don't buy.

 

You should know better than that. No government employee legally earns 200k per year. Cabinet level officials (i.e. ministers) have a net salary of about 6 - 7k.

 

When you say state-owned bank it can be confusing because in one way or another the government owns every bank in China with the exception of those like HSBC, perhaps. If you mean employees of the traditional Big Four, there is no way anybody except for, perhaps, the very senior management to legally earn 200k per year. It would be a miracle if a branch manager or even an area branch manager took home 7k per month.

 

The typical bonus for any of these people is a 13th month salary.

 

I can echo Bill's point as the government workers in China are low-paid when compared with those who work in the private sector. They often receive a few other benefits though like housing and a lifetime pension.

 

You forgot to mention graft.

 

They do have a great pension program. Although free housing was supposed to be eliminated, they do get a thousand or two as a housing allowance (included in salary figures, above). The real benefit comes when they are sold properties at far below market value. A rather large group of individuals at one particular state-owned bank has been offered 70 m2 units inside the 3rd Ring at 2,500 RMB per m2. This is not uncommon.

Edited February 27, 2010 by GDBILL (see edit history)