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Chinese Zombies in Global Real Estate

Coming to your neighborhood soon...?
I WANT to bring the spectre of zombies before your eyes, writes Callum Newman in Dan Denning's Daily Reckoning Australia.
Not some half-mad, limping, flesh eating army. I'm talking about a different type of zombie. Pay attention – one day it might be in your neighbourhood.
Imagine an area of new developments, well located and catered for with inviting restaurants and retails shops. Everything seems wonderful. But something is amiss. The place is a bit lifeless. There's less foot traffic. It's not dead, but it's not thriving. Welcome to Zombietown.
You can credit Canadian urban planner Andy Yan with the idea. This was the effect, he argued, that offshore (Chinese) money was having on parts of the city of Vancouver. The money was coming, but the people weren't. Areas of empty living spaces and lifeless streetscapes were emerging. The real estate buyers never actually moved in.
They just wanted a secure place to park their cash and the privileges that come with a Canadian passport. They could simply visit once or twice a year to meet the visa requirements. This absentee owner phenomena is one reason Canada has since scrapped its 'millionaire visa scheme'.
The economic benefits to the investors were actually very few. And ice hockey and maple syrup never had much to do with it from the beginning. Wealthy Chinese were hedging their position at home. They wanted a getaway plan locked in overseas should they ever need to flee China.
Now, if you happened to catch the front page of the Australian Financial Review on Wednesday, you can see how this ties in to Australia. The cage of the Foreign Investment Review Board is being rattled. From the article:
"Wealthy foreigners are illegally buying property because of Foreign Investment Review Board ineptitude, according to the federal MP leading an inquiry into the huge surge in property prices that has split Treasurer Joe Hockey and the Reserve Bank of Australia.
"Coalition MP Kelly O'Dwyer said evidence given to her inquiry suggested restrictions on foreign buyers – who cannot buy established homes without approval – are not being adequately enforced by the board."
An experienced property investor who works with developers told me the other week that, plain and simple, Chinese money is making its way into Australia, regardless of the rules. All it takes is an un-ticked form, a look the other way or a title in the name of a relative. And he thought the Canadian decision to ban the millionaire visa was sending even more money our way.
Cashed up overseas buyers blur the link between property prices and normal valuation metrics such as wages and rental yield. In the case of millionaire foreign investors, those have very little to do with their prime motivation. One would think this money is going to keep coming, so we better get used to it.
Of course, nobody knows how much Chinese money is leaking in because there's no conclusive data. There is the concern rising property prices might be increasing the chances of a crash.
You'd think that if we're dealing with wealthy Chinese, they're more likely to pay cash than use credit. That would seemingly make a crash less probable – for now. That's what the real estate cycle suggests as well – if you know where we are. It's always a question of timing.
There are, however, a mighty lot of residential towers going up or planned in Melbourne right now.
Tall buildings are something we track in Cycles, Trends and Forecasts for clues for timing the cycle as it progresses. Economic forecaster BIS Shrapnel warned that Melbourne was likely to be oversupplied with apartments in the next few years, citing slower population growth and a brewing oversupply of stock. Something to keep an eye on.
Regardless, despite the opinions and comments of all the experts, THE absolute best thing to know is where we are in the real estate cycle. That should be your starting point to put everything in perspective.
It's not as if all this is particularly new in history. I picked up a good book called Owning the Earth the other week. Besides my colleague Phil Anderson's book, The Secret Life of Real Estate and Banking, not many books make the connection between the land market and the boom and bust cycle. This one does.
Here's Andro Linklater, author of Owning the Earth, on the real estate cycle in the nineteenth century:
"The pattern of was most obvious in the United States, where five abrupt busts in 1819, 1837, 1857, 1873 and 1893 brought ends to periods of boom. Within each boom, there was a general upward rise in land prices over the period, at first gradual but then steepening as mortgage-lending accelerated to keep up, thereby fuelling an unsustainable burst of demand, and a final price explosion."
Linklater notes that 1873 was the first 'global' crash, known at the time as the Great Depression. The savage downturn of 1893 eclipsed it later. In turn, the Great Depression of the 1930s overrode that bust in popular memory. Doesn't seem like we've learnt much from this, have we?
We've now been living through what the Americans call the Great Recession since 2007. Where did it all start? Real estate. My suggestion: Learn about the cycle first, then make your moves.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

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