If you think back to the property crisis in 2008, property values across the US and the world decreased which sent economies in recession. The leverage in the economy was too much, but asset prices went down. Eventually they bounced back, but it took time and it is important to remember over the time, things had to change. In the US case one of the big buyers of real estate was hedge funds which now rent property for income streams, because when there is a recession no one is borrowing money or interest rates are low. If someone has access to credit when asset prices are low, and given the economy should recover, eventually those assets can be sold off at a profit.

In an article by Daisuke Wakabayashi and Joy Dong of the New York Times News Service, China has been going through what the US went through in 2008, but the property market has not improved yet. China’s Evergrande Group was once China’s biggest property developer. It had a sports stadium named after it and the owner was a billionaire. Owning shares meant only an increase and the company was building thousands of apartment buildings which investors were snapping up. Then the downturn came in China and in late August of this year, the shares have been delisted from the Hong Kong stock exchange and there is still $300 billion in debt, the company is working through.

At its peak, the property sector accounted for roughly 30% of China’s economy. Proceeds from land sales to property firms filled local government coffers and many Chinese households turned to real estate, believing it was safe investment for their savings.

One of the great things about China is its infrastructure, on the property boom, new roads and railways and everything else in the urban landscape was built. The local governments made money on the property boom. Then things came to a halt and construction slowed drastically, which is good for absorption of inventory. However, this is China with a central government which encourages some construction for the good of the economy.

The National Bureau of Statistics reported the amount of new housing is down almost 20% from the same period of a year ago, but the number of vacant homes available for sale is more twice the historical average, according to Yicai, a financial media and research group backed by the Shanghai municipal government.

China South City Holdings, a mid sized developer was ordered to liquidate because it had not made significant progress to restructure its debt.

An example of the property market is a apartment in Hefei, an industrial city in central China, the property was bought for $330,000 with upgrades costing $80,000. The property was listed for sale, dozens of real estate agents came to see, but the offer was 15% below the asking price or a loss of $100,000 if the property was sold. With the price ever get back to peak price? The owner does not think so, so a loss on the property at some point is expected.

Goldman Sachs in a research report noted that July sales showed few signs of recovering prices in the real estate market had been linked to top-tier cities.

Even the top tier cities are removing some restrictions, for example to cut down on speculative buying, the government had restricted the number of units someone could buy. The restriction has been eased in Shanghai where people can buy unlimited number of homes in the suburbs.

Linking to dividend paying stocks, asset prices go up and down, when they are down they are great buying opportunities, however you need access to credit. One method to gain credit is buy profitable companies that can pay dividends, the dividends give you cash and you can use to buy companies with low asset prices, have patience as they slowly rise again. Patience is a virtue.

There are more questions than answers, till the next time – to raising questions.