Boom, Bust, Boom, Across Asia
Before flying to China on this trip, Vicki and I visited young Thai friends in Bangkok. Our friend Sunny (age 30) had just bought a Bangkok condo for 2.2 million baht (about US$71,000). We wanted to see it.
The 22nd-floor condo has sweeping views of Bangkok’s outskirts. With only 35 square meters, divided into bedroom, living room, kitchen, and bath, the place felt cramped. And at over US$2,000 a square meter, the price seemed high for this part of the world. But the building sparkles with the good life, and lies very near a new light-rail station, due to open later this year.
Sunny told us he was about to buy a car to shorten his commute from the family home outside of town. But the tiny condo cost only a bit more than a car. And now he can commute without paying gas, parking, other operating costs. His commute has fallen from nearly 2 hours to 20 minutes. He can still visit family on weekends. And the new condo building has all the amenities he needs: pool, sauna, gym, decorated common areas, library, even parking, should he eventually have a car.
Sunny bought the condo with no money down. Eight banks had set up in the building lobby, and all offered 100% financing. True, Sunny has a good credit history and a steady job. Still, he only had to come up with 100,000 baht, about half for taxes and closing costs and half to prepay building expenses and utilities. He pays no interest for a year, and plans to pay down the mortgage during that first year as fast as he can. That way he’ll have a lower balance when the 5% variable rate kicks in.
Are we talking bubble here? A repeat of 1998, when the Thai economy, baht, and real estate market all collapsed, bringing down much of the Third World with it? Beats me. Whenever I see no-money-down I think bubble. Whenever I see high-rise condos popping up I think bubble. Then again I’d guess the bubble might have a ways to go before popping. Bangkok only recently got over the legacy from the 1998 crash. New construction has yet to keep up with demand.
Thai law says we foreigners may not own land or houses directly, but we can buy condos. Unfortunately, condos tend to decline in value, like cars or machinery, rather than go up in value, like land and houses.
All other things being equal, new condos sell for quite a bit more than old ones. Still, these days strong demand brings up all condo prices. In his case, Sunny figures his condo will go up a bit, and he’ll be able to rent it when he moves out in four or five years.
From Bangkok, Vicki and I flew to Sichuan province in southwestern China, and saw a very different story. In the big cities here–Chengdu and, especially, Chongqing–we’ve seen dozens of unoccupied condo towers that appear ready for occupancy. So are we talking bust here?
Again, beats me. But I can tell you that every time I’ve come to China before I’ve seen the same thing–unoccupied condo towers. And when I return a year or two later, the towers have people living in them.
Empty towers might be caused by delays in obtaining occupancy permits. We’ve run into permit delays elsewhere in Asia, for example, in Malaysia. And for sure the condo market all over China has softened in the past year, as the government hoped it would. The government has raised interest rates, raised bank reserve requirements, and taken other steps to dampen an overheated economy and real estate market.
One of the steps to calm speculation was to reject foreign buyers. The Wall Street Journal reported two years ago that the Chinese “announced new limits on the ability of foreigners to buy residential or commercial property on the mainland, in its latest effort to curb the inflows of speculative money into its economy and ease inflationary pressure.”
Most of that foreign buying came from wealthy Chinese from Taiwan and Hong Kong, as well as from Europe and North America.
Those limits remain in effect, so foreigners have a tough time buying and selling property here. And that’s the key point, I think. The world waits to see if a real estate bust develops. If a bust does develop, the government might allow foreigners back in to perk up the market. Overseas Chinese would then rush in. If you want to live in China, you might want to rush in, too, at least to take a look.
Be aware, though, China remains a communist country, in legal form if not in substance. I figure you never really own things in China. You own them only as long as the government wants you to own them.
Paul Terhorst
Continue Reading: Borrowing For The Purchase Of Real Estate Overseas
