Churchouse Letter
November 2016         by Peter Churchouse

A Market You Can’t Ignore: Part I

The Chinese property market is a market you can't ignore. You don't have to express a view, but you should know enough to have one. Its impact on global marketts is only getting larger.
We reiterate a buy position on our key 'Phase 4' investment theme.

I know that many of my readers sitting in Europe or the U.S. may wonder why on earth they should care about China property.

“I don’t own an apartment in Beijing and I don’t plan on doing so… it’s not relevant!” they cry.

Maybe five or ten years ago you’d be right.

But not any longer.

By now you should know that it is relevant. This is a US$1 trillion market. And if you think a collapse in Chinese property prices wouldn’t impact your portfolio, then think again.

Now, I’m not saying you must express your view on this market by being long or short. BUT you need to at least have a view of what’s going on.

This is about making informed decisions. And I see so much misinformation about China real estate, especially outside of Asia.

China’s property market sits on the edge of a deep precipice. Terms like “oversupply”… “ghost cities”… “debt”… and “collapse”… are commonplace.

This is the overriding view of China’s real estate market that I get from talking to people outside of Asia.

In reality? China’s property markets are in good health.

Transactions volumes are well above levels of recent years. And the chart on the next page (Figure 1) shows you the percentage of 70 key cities and their respective month-on-month price changes.

Month-on-month price changes in 70 key Chinese cities (December 2006 - October 2016

You can see that in around 90% of these cities (i.e. 65 out of 70), that prices are rising month-on-month.

Near term earnings prospects of major listed developers are robust.

Prices are certainly high. And make no mistake that we should be expecting a correction to the downside.

This is natural...

Historically such conditions have led authorities at national and local levels to introduce great swathes of rules, regulations, taxes, charges, fees designed to cool the market.

That is the condition China is in today.

The risk is not one of deflation, but inflation… to much of it. A potential bubble is brewing and left unchecked it could be problematic.

Thankfully, it’s not being left unchecked!

From putting the policy foot on the gas pedal, it is now being applied firmly to the brake pedal. And it will work. The real estate sector is primed to slow down.

Note: ‘slow down’ does NOT equal collapse!


To discover what this market can do for your portfolio, subscribe to The Churchouse Letter today.

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