20181105 What is happening in China?

20181105 (Mon)

What is happening in China? Property bubble burst?

This is something very important to know about property. Property to a man on a street is probably just the biggest investment in a lifetime. Property to a country is a lot more than this.

What is happening in China is the overheated property prices which cannot sustain its value. For example, you have a hut in a kampung. Your neighbour sold a similar hut for RM1,000. You sold it at RM1,100 a year later. This is because the buyers in your kampung are not in a hurry because it is just a hut. They have plenty of huts around. Furthermore, they have plenty of time looking elsewhere. Your kampung is not that great anyway.

Imagine your kampung now becomes Kuala Lumpur city. You probably could sell your “hut” for RM1,100 in just a month. Why? Because there are 1,000 times number of people looking for this “hut”. Ya, you might say, there are also many huts around. True! But, as more transactions are made, more people are certain that if they do NOT buy your “hut” now, they would have to pay higher for it soon.

Multiply that with 1.4 Billion of population. That is the scenario in China. OR at least multiply with 14 million, that is some cities in China.

When the prices skyrocketed over a longer period of time, it can mean its true value becomes diminished. The value becomes “hypes”. People buy “hypes” worrying that if they do NOT buy now, they will not be able to afford in the future. Therefore, a property which is supposed to be RM1mio can now sell at RM3mio.

How then are people sustaining the value? You still need money to buy the property, right? Yes, it is through mortgage. The bank instead of giving out RM1mio, is now giving out RM3mio. RM2mio is ‘hypes”. What would happen when this “hypes” evaporate overnight? RM2mio gone!

Would you as owner of RM3mio apartment repaying the loan choose to keep on servicing RM3mio loan? OR default the loan and go buy one new similar property at RM1.5mio – half of its original price?

That is the problem in China now.

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