China Bubble Indicator: Chinese Buying of High Profile US Properties

While I often refer to the skyscraper indicator as one important gauge to appraise the whereabouts or the stages of the bubble cycle, there seems another potential bubble indicator: foreign buying of US high profile properties.

Recently a Chinese firm reportedly bought JP Morgan’s 1 Chase Manhattan Plaza

From the Bloomberg:

JPMorgan Chase & Co. (JPM) has agreed to sell 1 Chase Manhattan Plaza, the tower built by David Rockefeller, to Fosun International Ltd., the investment arm of China’s biggest closely held industrial group, for $725 million.

Fosun, which invests in properties, pharmaceuticals and steel, is buying the 60-story, 2.2 million square-foot, lower Manhattan tower, according to a statement it filed to Hong Kong’s stock exchange.

China’s developers and companies are expanding in overseas property markets as the government maintains curbs on housing at home to cool prices. Greenland Holding Group Co., a Shanghai-based, state-owned developer, this month agreed to buy a 70 percent stake in a residential and commercial real estate project in Brooklyn.

We have seen this phenomenon before, particularly, during the "Japan Inc" bubble era of the late 1980s. 

Japan's asset bubble eventually imploded in 1990

This 1996 article on Japan's US property acquisition from the Chicago Tribune resonates on today’s buying spree of US properties by the Chinese. [bold mine]

No property epitomizes failed Japanese investment in U.S. real estate more than New York landmark Rockefeller Center.

Mitsubishi Estate Co. paid the Rockefeller family $1.4 billion for an 80 percent stake in the complex in 1989 and 1990. By early 1995, Mitsubishi had lost more than $600 million on its investment and put the property under bankruptcy protection. Late last year, it decided to hand the property over to its lenders.

Aoki Corp. of Japan, which bought the Westin Hotels and Resorts chain in 1988, hasn't fared much better. In 1988, it paid United Air Lines' parent Allegis Corp. $1.35 billion for the company. It ended up selling the chain's North American and European operations and some other assets to two U.S. investment firms for $561 million in December.

Japanese real estate developer Minoru Isutani's purchase of the Pebble Beach golf resort is another famous case. In 1990, he bought the California championship golf course for $841 million. Isutani sold the property about 18 months later to two Japanese companies at a $340 million loss.

Again as one would note that during the peak of Japan’s bubble 1988-1990, Japanese investors went into a shopping binge similar to Chinese investors today. And 'Rockefeller' properties seem like a coincidence or has been a prominent feature of extravagant transactions.

More from a 1992 LA Times article (bold mine) 

The drying up of Japanese real estate money in California was even more dramatic. Total investment tumbled 83% to $976 million, a trend the study attributes to the state's steep recession. For the first time in four years, Hawaii attracted more Japanese real estate money than California. Los Angeles was eclipsed by New York and Honolulu as the cities of choice for Japanese real estate funds.

Orange County, once one of the top 10 locations in the country, fell 95% to $32 million. Los Angeles dropped 65% to $590 million as a city of choice for Japanese funds. Japanese real estate investment fell 87% to $138 million in San Diego, and 74% in San Francisco to $127 million.

The results signal an end to a shopping spree that began in 1985 when cheap capital, the yen's exceptionally strong buying power, and loose lending standards by Japanese banks prompted scores of Japanese to pay record prices for some of the most famous office buildings and hotels in California, New York and Hawaii.

Today we have a strong Chinese yuan and massive expansion of credit in China's formal and informal banking system that has been fueling a domestic property bubble.

Yet paying for “record prices for some of the most famous office buildings and hotels” in the US seems like a variant of the skyscraper curse. Instead of the building of grandeur projects to showcase overconfidence, foreigners buy signature edifices.

Again the sale of JPM’s 1 Chase Manhattan to a Chinese investor could signify a manifestation of such symptoms.

And paying for “record prices for some of the most famous office buildings and hotels” in the US, reminiscent of the 1980s, has been a du jour dynamic or trend, not limited to 1 Chase Manhattan.

From the New York Times last June [bold mine]

And yet in recent weeks, several big deals in New York City have set real estate circles abuzz. Zhang Xin, a Chinese business magnate and chief executive of the largest commercial real estate developer in Beijing, joined forces with the Safra family of Brazil to buy a large piece of the General Motors Building in Midtown. Dalian Wanda Group, a big Chinese developer, said it intended to build a luxury hotel in Manhattan. (Wanda is also planning to build a hotel in London.)…

For the moment, the Chinese government is encouraging the investments and even helping to finance them. The state-owned Bank of China has become the largest foreign lender in commercial real estate deals in the United States, replacing big European banks. Beijing is eager to diversify its investments…

The Chinese aren’t limiting themselves to megadeals. Some purchases have been relatively small by the standards of commercial real estate. Ms. Zhang, who is the chief executive of SOHO China and one of the richest women in the world, paid about $600 million in 2011 for a 49 percent stake in the Park Avenue Plaza, a Midtown Manhattan skyscraper. That same year, the real estate arm of the HNA Group, a Chinese airline company, saved an office building at 1180 Sixth Avenue from foreclosure for $265 million. HNA also bought the boutique Cassa Hotel in Times Square.

Chinese investors or firms have also bought large hotels in California, including the Sheraton Universal in Universal City; the Crowne Plaza in Burlingame, near the San Francisco airport; and the Hilton Ontario in Ontario. They have also purchased a riverfront parcel in Toledo, Ohio, and, earlier this year, an office building in Morristown, N.J.

Chinese firms and investors are also betting that the potential returns in American commercial property markets will be higher than in other areas of the world. The market for office, industrial and retail property appears to have bottomed out. Office vacancy rates have fallen and rent prices have stabilized amid signs of economic improvement. And while competition is heating up — three Manhattan office buildings have sold for more than $1 billion so far this year — many of the big bidders and lenders from Europe have pulled back as their home economies struggle.

So we see China’s homegrown bubbles spilling over in the form of diversification through increasing exposure on US properties. And these manic buying activities has been partly bankrolled by China’s state-owned bank. 

Finally, the Chinese property buying spree appears to be contributing to the Fed inspired reflation of the US property bubble.

A case of Déjà vu?

 

Yet there seems another angle from which the JPM property deal may have been made.

Since JP Morgan’s 1 Chase Manhattan Plaza has one of the “world’s largest bank vault” which houses the company’s gold holdings. This could be related to the Chinese government’s attempt to secure gold vaults worldwide.

The Zero Hedge speculates (bold original)

So, what the real news of today is not that JPM is selling its gold vault, we knew that two months ago, or that it is outright looking to exit the physical commodities business, that too was preannounced. What is extremely notable is that in one very quiet transaction, China just acquired the building that houses the world's largest gold vault.

Why? We don't know. We do know that China's gross gold imports from Hong Kong alone have amounted to over 2000 tons in the past two years. This excludes imports from other sources, and certainly internal gold mining and production.

One guess: China has decided it has its fill of domestically held gold and is starting to acquire gold warehouses in the banking capitals of the world.

For now the reason why is unclear but we are confident the answer will present itself shortly.

While the gold aspect has been interesting, the Chinese buying of high profile US properties seems as increasing, deepening and worrying signs of bubbles that are about to mature or are likely to burst soon.

Horse Racing Inflation

For the mainstream, price inflation has been seen as inexistent because the CPI indices tells them so.  Government data for them is seen as inviolable or sacrosanct even when real world experience suggest otherwise.  

They ignore the fact that money flows into the economy have been in a relative manner: different stages, different industries at distinct levels, speed and degree, such that the consequence of monetary policies has been a relative price inflation (chart courtesy of Doug Short).

Never mind too that record high stock markets and surging property prices have been emblematic of price inflation on the asset markets.

And that money flowing into asset markets have likewise led to bubbles in art and to other collectible markets.

Well add to this collection of bubbles, the thoroughbred racehorses. From CNBC

The market for racehorses took a big spill during the recession and didn't look ready for a comeback anytime soon. But suddenly, Thoroughbred prices are charging ahead.

The Keeneland September Yearling Sale—the nation's premiere Thoroughbred auction—is just winding down, and the numbers resemble those from precrisis boom times.

Keeneland said 18 yearlings sold for $1 million or more. That's the highest total since 2008 and more than twice last year's total. The most expensive sale was $2.5 million. Though that's below the top-horse price in 2006, which topped $11 million, it's more than double last year's.

Sales this year total over $264 million, up 23 percent from last year and the highest since 2008. The average price of $130,780 is up 31 percent from 2012.

The ballooning prices of "toys for the big boys", amidst tepid economic growth (chart from Zero Hedge)  are signs of the inequitable distribution of wealth—a subsidy to rich at the expense of society—brought about by central bank’s current zero bound rates and QE policies.

Will Slowing Foreign Buying of US Properties Derail the Housing ‘recovery’?

Foreign buying of US real estate appears to be slowing, will these compound on the recent setback brought by rising bond yields?

Reports the CNBC.com

The flood of money pouring into U.S. real estate from the overseas rich may be slowing.

Foreign purchases of real estate in the U.S. dropped 17 percent in the 12 months ended in March compared with the same period a year ago, according to the National Association of Realtors. The high end of the market felt the brunt of it.

Sales of homes priced at $1 million or more to overseas buyers dropped to about 6.5 percent of sales from 10 percent—the sharpest drop in any price category.

There are several possible reasons for the slowdown. A stronger dollar makes U.S. real estate less attractive on a currency basis. The NAR said mortgage standards also tightened, making it harder for overseas buyers to qualify for loans.

But the main reason is economic weakness overseas. "Economic slowdowns in a number of major foreign economies appear to have been a major reason for a drop in sales; a number of potential customers apparently held off on purchases," the report said.

Wealthy buyers from China, Brazil and Russia have been critical to the real estate recovery at the high end of the market—especially in Miami, New York and parts of California. Brokers fear that if wealth creation slows in emerging markets, high-end home sales could also weaken.

Since bond yields exploded last May, the “recovering” US real estate industry has shown signs of fatigue strains. 

Mortgage applications has gone down along with rising  mortgage rates (lower window, rates are inverted).

This has also been reflected on a sharp downturn in Home Sales (upper window) according to the Zero hedge

Housing starts and housing permits has also tumbled, again from another Zero Hedge report

The Reuters recognizes of the June decline of US existing home sales, but attempts to paint a bullish picture by referencing year on year increases. But last year bond yields were at a low, the tumult in the bond markets began only this May. So one data covers differing conditions at different time frames.

Meanwhile contra Reuters, the cynical Zero hedge notes of negative month on month changes on existing home sales.

Construction trends haven’t been rosy too. Multi starts and single family starts have been in a short term decline even as builder’s sentiment soared.

Don’t worry, be happy. The Northern Trust economic team believes that the “bloom is not off the housing recovery yet” since they see a “steep and rapid climb” of mortgage rates as “unlikely”. This means that experts from Northern Trust see the recent “steep and rapid climb” as an anomaly. 

However, stock prices of major homebuilders as DR Horton (top) and Lennar (bottom) have hardly been lifted by record US equity bellwethers.

Both interest rate sensitive stocks plunged on the re-emergence of the bond vigilantes.

The general decline of Lumber prices have also barely been in support of a sustained recovery on US housing.

And so with copper prices (which has also been a China story)

And finally, while negative equity has fallen, many millions of “Americans still owe more than what their homes are worth”, according to the Dr. Housing Bubble.

Delinquent loans continue to rise.

These indicators don’t seem to support a "robust" "real" housing recovery but instead reveals of a fragile boom prompted by easy money speculations.

Yet if the bond market vigilantes continue to impose their presence on the global markets, then yes, growth in emerging economies are likely to suffer a pullback, which will also likely affect buying patterns on US properties. 

Equally, higher bond yields transmitted to higher mortgage rates risks reversing the current boom phase of the reflated US housing bubble.

So the bond vigilante triggered headwinds confronts both internal and external dynamics of the US housing boom.

Interesting times indeed.

Video: Real Estate "Frenzy" in California

Central bank policies have been fueling a mania on a vast category of asset prices worldwide.

The following video reveals signs of a growing real estate frenzy in California (source: Calculated Risk). 

Note of the term used by the video anchor "bidding war", "it's a frenzy, "psychedelic" and "people want to know how hot it is".

US Real Estate Bubble Bust: Chinese On A Shopping Spree!

Savings rich Chinese individuals are doing their own version of "stimulus financing" of Americans, by buying bargain priced houses.

From America is for sale Expo 2009
Video from NBC Los Angeles