Put This on Your Real Estate Checklist

Today’s Daily Reckoning will ask you to ignore the headline numbers about Chinese real estate and focus on the bigger trend. In case you missed it, Reuters reports Chinese property prices fell 2.6% year-on-year in October.

But here’s the story I found far more compelling. The Global Times reports that parents in Beijing are paying huge amounts of money for properties — even if they’re little more than tiny dumps in an alley. Why? So they can register their child under the hukou system in neighbourhoods with the best primary schools.

In April the Beijing authorities issued the rule that enrolment had to be based on the child’s address and proximity to the school, and nothing else.

This ‘reform’ is sending property prices close to good schools through the roof. The article reports:

In 2009, just after getting married, Li and her husband bought a 130-square meter apartment and decorated it in the Lishuiqiao area, Changping district. The price was about 9,000 yuan ($1,469) per square meter. But now they will buy the 5-square-meter room [close to the school] in the alley at a price of 1.35 million yuan ($220,390). This means they are spending 270,000 yuan ($44,078) per square meter.

In China, education is paramount. According to China watchers closer to the ground than I am, paying prices like these is actually cheaper than attempting to bribe local officials or paying the tuition fees for an international school. Plus parents can always resell the property, probably for a substantial gain, when their child graduates.

Houses near good schools cost more. This happens all over the world and the trend is now showing up in China. The locational advantages of living somewhere — anywhere — will always show up in the land price.

It proves that the real estate cycle drivers are there, right in front of us. Huge numbers of people from both India and China are integrating into the Western ‘capitalist’ (rent seeking) model. It will certainly be more than enough to drive the next cycle to extreme levels, just as history shows with every past cycle.

It’s also a hint for Australian real estate. Richard Jenkins, the Victorian research director of real estate consultant Knight Frank, made this interesting observation on Chinese buying habits in Australia yesterday: ‘Interest from offshore buyers continues to focus on these suburbs largely driven by nearby education institutions, both secondary and tertiary levels. Australian education is a key driver of offshore purchasers.

You always have to be sceptical and do your own research, of course. But Richard’s research confirms the findings of another independent expert on Australian property who I know. In fact, we’ve asked her to prepare a report on the key factors driving Australian property and where you should be looking to invest for readers of Cycles, Trends and Forecasts. Her results will appear next month.

Of course, a distinction needs to be made between Asian buyers who have emigrated to Australia and those based offshore. Property website iProperty [ASX:IPP] came to my attention yesterday. The Australian Financial Review reported the company is planning to sell off-the-plan Australian apartments directly online to their network of Asian buyers. According to the article, they’re already doing it in Malaysia.

Taking a look at the chart, there’s little to get excited about the stock itself.

iProperty Under the Moving Average

Source: STEX

But it doesn’t take much imagination to see how companies like this will facilitate even more money getting parked into Australian real estate. You might have heard about the release of Prosper Australia’s Speculative Vacancies report last week. It’s well worth reading.

If you didn’t, they employed abnormally low water use as a guide to estimate which Melbourne suburbs have the most properties being held off the market. Underpinning this is the assumption that these properties are being hoarded for the capital gain. That’s most likely true.

The Age reported on the story last week:

The urban-renewal suburb of Docklands had the highest number of speculative vacancies, with 489 or 17 per cent consuming no water in 2013. Another 290 used less than 50 litres of water on average each day, leading to assumptions that they were empty or rarely used.

But these properties could easily be owned by foreign buyers securing their money away from their home government, with any capital gain a bonus.

Either way, if you’re interested in property investment, the report reveals that the vacancy rates the real estate industry usually quotes are bogus. Don’t trust them. And stay very sceptical indeed.

Callum Newman+
For Markets and Money

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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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