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Sunday, October 16, 2011 2:21 PM

Property Developers Hurting in China; New Homes Sales Down 50% in Shanghai; Preposterous Prices Won't Last; Commodities to be Hit in Building Slump

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Developers in China are struggling and it's about to get much worse because China Construction Bank Raises Mortgage Rates for first time borrowers according to the Wall Street Journal.

Channel News Agency Asia reports Credit crunch in China hurts property developers

The co-founder of SOHO China, one of the nation's leading developers, is worried Beijing's efforts to cool the sector are hurting sales and threatening to send some debt-laden property developers to the wall.

"In my sixteen years as a developer this is by far the most challenging year I've ever had, in terms of what we could sell," Zhang, chief executive of Beijing-based SOHO, recently told reporters.

Since the beginning of this year Beijing, fearing a bubble, has been trying to bring down dizzying prices by hiking interest rates and restricting lending to developers, making it nearly impossible for many to get financing, Zhang said.

Industry officials and analysts are worried that the measures are now squeezing sales so much that property developers who have borrowed heavily to fund new projects could be tipped into bankruptcy.

"A wave of newly completed property is about to hit the market. Developers are likely to find themselves holding large volumes of unsold property."

In Shanghai -- where the average cost for one square metre of downtown housing was 48,000 yuan (about $7,500) last year, about 12 times the average monthly salary -- home buyers have little sympathy for cash-strapped developers.

"Considering the high housing prices in Shanghai, a new flat is just a dream," said Qian Xueqi, a manager at an international hotel.
Housing Math in China

One square meter = 10.7639104 square feet
Cost per square meter = $7,500
Cost per square foot = $7,500 ÷ 10.7639104 = $696.77
An 800 square foot home (74 square meters) would cost $557,418

How many in China can afford that? Moreover, other than bubble mentality, there is no reason to pay such prices, even if one could afford it.

Commodities to be Hit in Building Slump

Home prices will not perpetually stay levitated above wages regardless of perceived shortages. Notice I said "perceived" shortages. Housing shortages in China are a mirage just as they were in Florida, Las Vegas, Phoenix, San Diego and other places in the US.

In China, bubble dynamics coupled with inane government intervention and growth policies make it appear as if there are shortages. The entire property sector in China will collapse as will the demand for commodities need to build those houses.

Mike "Mish" Shedlock
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