70 cities in China were surveyed and 47 of those cities reported a decline in property prices greater than the national average. Compared t
o February 2014, property prices fell more than 5% in February 2015. Interestingly, China implemented a quantitative easing program to encourage borrowing, but the property market continues to slide. One firm, by the name of Kaisa Group, has been hit the hardest. Their aggressive business model led to their hard hit. The group borrows a lot of money, builds quickly, and then assumes that the cashflow that they will receive from sales will allow them to pay off their debt. However, when the sales don’t come the company can’t afford their payments and have to default. Since this firm was over leveraged the company was forced in to a buyout buy a rival firm.
Over leveraging can lead to many issues, which will in turn harm investors. I would be curious to see if Kaisa had their properties cross collateralized. If so, they could end up losing a lot more than just one property.
There have been talks of implementing new monetary policy such as lowering the reserve requirement to try to stimulate the slowing property market.
Source: http://www.wsj.com/articles/china-property-prices-roll-downhill-1426670216
With the proliferation of overleveraged construction projects in China, it makes sense that property prices declined because there is so many properties. The bubble is real. Interesting to see what affect continuing lower prices will have on rural migration.
See comments on the previous post. This one has different examples and details, so complements it.