The Next Surge in Chinese Real Estate

Dollar amounts measured in the trillions roll off the tongue a little easy in these days of central bank bailouts and historic government deficits. But the world financial system has yet to produce a trillionaire, at least in Aussie dollar terms.

But if you owned all the land in New South Wales — residential, rural, business and industrial — you would be one, at least according to the NSW Valuer General. He tallied up the numbers to show that the value of land in NSW has risen more than 11% in the twelve months to July 2014.

The headline story is the fact that four areas of Sydney — Waverley, Hunters Hill, Willoughby and Manly — now have median prices above a million dollars. But look at the gains being booked. According to the Australian Financial Review,Willoughby, up 37 per cent, Bankstown up almost 30 percent and Hornsby, which rose more than 25 per cent.

These twelve month returns. Is it any wonder that investment loans to housing are at an all time high? When’s the last time you got that kind of pay rise? It’s for this reason we included a link in the latest issue of Cycles, Trends and Forecasts to a document that’s essential reading for all property investors in NSW.

We dubbed it the Speculators Guide to Sydney. The best part is the government has done all the hard work for you. You’ve seen the gains up for grabs. If you’re interested in NSW real estate, do yourself a favour and make sure you read it.

At least one part of the dynamic that’s driving land values in Sydney is about to show up in China. This is a very notable development, which the mainstream is absolutely certain to miscalculate, if they even notice. In fact, it all seems so politically correct, eco-friendly and sensible, but the implications are anything but. What is it? Green belts might be coming to China.

The Wall Street Journal reported last week: ‘China is ordering its big cities to deliver on a years-old policy to stop their sprawl. Instead of ever-expanding highways and high-rises, China’s biggest cities would be ringed by green belts, permanently zoned as farmland and off-limits to developers.

¬ According to the article, the Chinese authorities are trying to preserve arable farmland on the outskirt of their major cities. Is that their motivation? Maybe. What we can infer reasonably is that this is will likely be the source of China’s next surge in land values.

In fact, it’s quite possible that the vested interests who control China — and have a lot of their wealth tied up in real estate — are all for it for that very reason. That’s why the vested interests in Australia and the UK like green belts (or ‘urban boundaries’) — and they can hide behind the environment while they pocket the gain.

Economist Martin Wolf wrote about this very issue regarding English property in the Financial Times last week. According to him, the supply of new housing construction in the UK in 2013-14 was under half of the figure it reached in 1969‒70. The problem is builders can’t get access to land, because they’ve been shut off. Only 11% of the UK is urbanised, but the people are hammered into smaller and smaller living spaces. Here’s what Wolf had to say:

The restrictions on land availability are man-made. They are due to a control system of baroque complexity that has not only constrained supply, but, far worse, has created a set of vested interests in its continuation. Among those interests are local residents, homeowners in general and the banks that finance them.’

Zoning like this creates a false scarcity. That drives up the value of the sites within the boundary, with existing landowners reaping the gain. Even if the site isn’t occupied, the landowner can hold it off the market in the expectation of further capital gains. As long as the city is growing, scarcity will drive up its value. The banks can also mortgage the higher values for anyone wanting to buy in. Land outside the boundary is shut off from development. And those landowners are left with rural bidders only. The difference in land values right next to each other, but on either side of the boundary, can be as high as ten times in value.

Economist Leith van Onselen says urban boundaries actually exacerbate urban sprawl because developers eventually leapfrog the boundary and go further out to ‘cheaper and less restrictive jurisdictions. They then turn aroundand lure buyers who still commute into the city. This in turn stresses social services and infrastructure as the population sprawls ever outward.

According to a colleague in the real estate industry, developers who own land and want to maximise profits, time their releases carefully. To protect existing land values and profits, they cut down lot sizes, rather than reduce prices. It’s a process over which the government has no control — ‘in other words, the state has auctioned away any chance of a plentiful supply of cheap fringe dwellings.

Now back to China. Thanks to the artificial scarcity created by green belts, China should see the same forces driving land prices ever higher in major Western cities. The landowners in Chinese cities will bank more profits — wealth that could head offshore and wind up here. China is increasingly mimicking the West’s real estate model. Meanwhile, it’s importing the boom-bust nature of the Western economies. History shows this process runs in 18‒20 year cycles. If you don’t understand this process, you are at a substantial investment disadvantage. See here to find out why.


Callum Newman+
For The Markets and Money

Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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