Thursday, August 23, 2012

Chinese House Buying Negotiations

Today I went with my family to go look at houses in some Shanghai suburbs an hour from the city. The houses were what we call "别墅", or multi-story mansions at around 320 square meters (~3000 square feet). What struck me as very humorous was how Victorian the sellers would adorn the showcase houses. The curtains were very gaudy, and the walls were often covered with old fashioned paintings of people from 18th century England. Photos were strictly of Europeans and Americans, adding to the western image.

Yet beneath the facade of grandeur, there seemed to be signs of something more pernicious. When we sat down to discuss prices, the agents asked for us to, on the spot, give them ¥100,000 RMB (~$16,000 USD) for a voucher. The voucher would reimburse us for ¥100,000 RMB if we decided to buy the house and would also  guarantee us the opportunity to buy one of the "few" houses that were still selling at about ¥3.5 million RMB (~$550,000 USD). We were a bit taken back, but they explained to us how it would be an almost zero-risk transaction, as the fee wouldn't commit us to actually purchasing the house -- it would just be an indication that we attended their showing and were interested in buying. If we decided not to purchase, we could withdraw our money a month later without any fee. The conversation went something like this:
"Is there some contract or paperwork for this agreement?" my mother asked.

"No, it's just this voucher -- see here. After you swipe your card, then we give you this voucher that clearly says that you are entitled ¥100,000 RMB towards buying a house. And your money will be safe if you don't want to buy, you can get your money back after a month," one agent said.

"Well, I don't have ¥100,000 available to me today. I plan on taking out a loan to buy a house."

Another agent introduced himself as the deputy-manager and said, "If you don't have it all today, that's fine. You can pay ¥20, ¥30 thousand today and pay the rest tomorrow."

"I don't know. Isn't there some kind of something that I can get signed?"

Yet another agent, lanky and with a pen twirling in his hand, replied, "How about this, I can write out a note saying that you have a right to the ¥100,000, and I'll sign it."

I perked up and asked, "Why do you need the ¥100,000 anyways if it doesn't commit us to buying the house?"

"Well, we need the cash flow. We can't keep the bosses always waiting, and they won't be happy if we don't bring in some near term revenue," the first agent replied.
In the end, we didn't give them the money. But the discussion along with other observations seemed to confirm several running hypotheses about China right now.

First, there seems to be a serious liquidity, if not solvency, problem among Chinese housing companies. The housing complex that we were looking at has had difficulty selling in the past two months, and they actually had just cut prices by about a million RMB to boost sales. While they tried to project an image that people were scrambling to buy the houses, there were still three agents aggressively trying to get us to sign. Admittedly, there were quite a few other families looking at houses, yet the agents' ploy for ¥100,000 still seemed like a desperate attempt for liquidity to meet payroll or something more fundamental. This anecdote seems to confirm Patrick Chovanec's analysis that many loans are coming due during this second half of the year, making it difficult for property developers to stay afloat.

Second, Chinese finance is highly uncertain. What did we have to guarantee that the company would actually pay back our ¥100,000? In truth, nothing. There was no hard contract that we could take to the courts, and if the company took a hit from collateral calls as their loans came due, we would be dead in the water. They would be playing with, as Karl Smith likes to say, "other people's money". Once we think about this precarious credit situation in the context of rapidly slowing manufacturing and fragile credit guarantee companies, things are not looking good at all.

3 comments:

  1. Your personal experience indicates that there is something bad going on, and I don't like it. But the world doesn't need "confirmation" of ABCT any more than it needs a contraction in China...urgh.

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  2. I susspect that China was going thru a boom, and will now see an intermittent balloon spin & jump (what is it called when you let go of a balloon and it jumps around the room?).
    Not a pop, like the US 2008 (after the 2006 peak). More like the '79-81 reduction/ correction sort of plateau.

    2-4% growth, solid for a developed country but far less than China is used to, might well allow them a "soft landing" slow growth relative recession. That might be long term optimal for China.

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