Reverberations in Goa from China's property market collapse - Sep 8

Bankers and investors around the world are extremely nervous these days the latest data from China indicates an increasingly bleak scenario is rapidly accelerating into focus. When the US property market crashed in 2005 to 2008, it triggered lasting devastation in the global economy. Now the same thing seems be happening all over again. China's property market is teetering on the brink of disaster.


Most analysts acknowledge the truth is worse than official data indicates: that last month home prices again fell in 64 of 70 Chinese cities (the biggest decline since records began). Floor space sold is down 16.3%, despite many cities scrambling to ease home purchase restrictions. New construction starts have fallen by 25%, actual housing prices are declining for the first time in modern Chinese history, and the impact has been a marked slowdown in national GDP growth (where real estate and associated sectors account for 16%).


Still, all this happening in a highly controlled command economy, with an agile and protective government united to ensure social stability is maintained, and political unrest avoided at virtually any cost. China's spectacularly fluid and dynamic labour force will be shifted around and compelled to fill the property vacuums. Premier Mr Li Kequiang has already eased controls over property sales, and this week promised more of the same. It's a very bad situation a 4% to 5% hit to China's GDP can be expected the next few years but not nearly as bad as it will be elsewhere, when the same thing happens.


Over here in India, a blithe consensus has long been held, you can never go wrong with property. For decades after Independence in 1947 just like in China all these years that view held true. Property prices never declined, and eventually demonstrated world-beating appreciation: New Delhi and Mumbai property became some of the most expensive in the world. Even little Goa's property prices are now directly equivalent to many parts of Europe. But the real data behind the hype already indicates a different story.


According to Residex, the National Housing Board's index of actual transaction prices in 26 Indian cities, there has been less than 9% nominal appreciation across the board from 2007, which gains are entirely cancelled out by the 9% inflation rate. There are regional and situational variations, but the general conclusion is inescapable Indian property values stopped their inexorable growth 5 to 7 years ago. Though absolute prices remain high, a certain ceiling has been reached. Now the only way to go is down.


The problem in the Chinese real estate sector can be summarized in one word: overbuilding. Developers competed with each other to drive up commodity prices and massively expand the luxury housing sector. Exactly the same thing happened in India too, with hugely overpriced housing estates mushrooming everywhere from Chandigarh to Caranzalem. And so just like in China prices have begun a previously unthinkable decline. Residex indicates more than 20% drop in Delhi alone.


The same is crystal clear in Goa, where prices reached unsustainable levels several years ago, and again just like China most of the rise is attributable to hot money from speculators. The 2011 Census indicated that 25% of homes in the state are unoccupied. But that remarkable percentage is actually very much higher in all the egregiously inappropriate high rise construction in Dona Paula and Dabolim, and Reis Magos and Ribandar and many other illegally urbanized villages across the state. The same census very worryingly indicates that by far the largest construction activity in Goa is unoccupied real estate more than school buildings, hospitals, places of worship, factories and worksheds combined.


The explosive real estate boom in China had a highly significant rolling effect in Goa. The market price for iron ore soared to its highest in history, and we now know the established players were joined with an army of newly-minted miners to pillage the state's resources to such an extent the Supreme Court had to recommend complete cessation of all mining activity in Goa until the illegalities could be controlled.




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