Writing Blog

September 8, 2010

The Chinese Housing Bubble

Filed under: Finance — Rafael Minuesa @ 2:41 PM
Tags: ,
This is one of a series of articles I posted at the Mortgage Girl Blog.
You can view the original version at: 

chinese skyscrappersAn estimated 64 million apartments and houses sit empty in China today. That number is almost two times the population of Canada, but if we consider that each of those properties is the average dwelling for a typical Chinese family of three (parents and one child), all those vacant apartments and houses could accommodate almost 200 million people, which is the equivalent of two-thirds of all U.S. souls or more than 15% of China’s 1.3 billion population.

Escalating prices in China have transformed the country within two decades from a landscape of modest houses and huts next to vegetable fields to modern houses and skyscrapers scattered all over the country, specially in major urban centers like Shanghai and Beijing. Statistics from Goldman Sachs showed that over the past six years, housing price hikes have outpaced income rises by 30 percentage points in Shanghai and 80 percentage points in Beijing. In Beijing, the housing price of per square meter is as much as a resident’s seven months’ salary on average.

The Chinese property market has set new record highs after the government unleashed $1.3 trillion in new bank lending to counter the global recession. The nation’s real estate and stock markets are a “bubble” that will burst when inflation accelerates in 2011, as described by former Morgan Stanley chief Asian economist Andy Xie:

“China’s asset markets are a Ponzi scheme,” said Xie, now a Shanghai-based independent economist. “Property is heading for one huge bust that will take a year and a half to unfold.”

Premier Wen Jiabao said late last year that property speculation must be suppressed, and the government proceeded to reinstate a sales tax on homes sold within five years of purchase after reducing the period to two years in January 2009. These new regulations are meant to address the escalating price trend, although many analysts doubt they will have any real effect. Take for example Gloria Gu, who paid $483,000 in mid-2009 for an apartment near Shanghai’s financial district so her 3-year-old son could attend one of the city’s best kindergartens. Six months later, a similar place in her building sold for $615,000.

Borrowers are maxing out all available lines of credit, fearing that they might miss out on this extraordinary opportunity. Luo Yan and her husband took out the maximum amount of money possible, a story reported by the China Daily: “Thirty-year-old Luo Yan and her husband raced to complete the purchase of a three-bedroom apartment in Shanghai with the help of an 800,000 yuan ($117,000) mortgage. The amount they borrowed was the maximum they qualified for.” As Luo put it, “I am afraid that if we don’t do something now, we will certainly miss the boat.”

But there are also demographic factors. Due to the shortage of women, men in China feel they need to buy a home in order to get married. And the harsh truth is that it certainly makes them look like better candidates.

The government is aware of the situation and is ostensibly trying hard to prevent a financial bubble, warning banks to increase their deposits and capital on hand in a bid to control lending. They’re also putting restrictions on property purchases. Any resident trying to purchase a second home in China will require a minimum 40% down payment, which is clearly aimed at preventing a situation similar to that of the U.S. in recent years.
On July it quashed rumors that real estate curbs will be loosened and that restrictions on banks granting mortgages for third homes could soon be relaxed. Rumors were swirling with China Daily headlines like, “Third-home mortgages back in some big cities.” The paper reported that, “After banks in Shanghai, Nanjing and Hangzhou started to give out loans, their counterparts in Beijing and Shenzhen also reopened the business to lend money to those who wish to buy a third home.” But the Chinese banking regulator insists there was never any break in the policy restricting the number of home purchases allowed, reporting that a statement from authorities said, “Commercial banks need to carry out current policies strictly.” The Ministry of Housing and Urban-Rural Development also reiterated that it will maintain curbs on speculative purchases and increase market supply, countering all those media reports.
Will the Chinese government succeed in curtailing this worrisome trend that has brought down to its knees the economies of other Western countries? Hard to tell yet. The Chinese have pulled off some extraordinary feats and have succeeded in some economic areas where many others have failed. If they do manage to pull through this one, the West would certainly have lots to gain by being willing to learn a lesson or two from the East.

Read more:

Also from the Wall Street Journal:
China’s Looming Real Estate Bubble

April 19, 2010

Precautions you should take when buying second hand marine equipment

Filed under: Boats,Finance,Sports — Rafael Minuesa @ 1:22 PM
This is one article I wrote for the Used Boat Gear WebSite.
You can view the original version at: 

If after buying an used marine item you find that you have mislead and the quality of the article is not what it was advertised, there are a plethora of things you can try to get your money back, but none of them is guaranteed to succeed, unless you have taken the necessary precautions beforehand.

It all depends on whether you as a buyer can establish that the seller took substantial steps to conceal the problem for the sole purpose of selling the item to an unsuspecting buyer, and whether the broker (if there was any involved) knew of the concealment.

The law is also different depending on the state in which the transaction has taken place. For example, although law in California requires various disclosures to be made in real estate transactions, that requirement does not extend to boat-related sales. As such, it will be extremely difficult to hold a seller liable if he or she remains silent regarding any known faults with the items being sold.

A broker may be held under a different standard. For example, if the buyer was represented by a broker who was involved in a prior rejected transaction due to some kind of faulty specifications or who otherwise knew of the problem, that broker may be found liable for breaching the fiduciary duty owed by every broker to a client.

That goes to show why it is never reasonable for a buyer’s expert to rely upon the seller’s representations. The job of a buyer’s inspector is to perform an independent inspection, and any representations made by the seller should be disregarded during the inspection process.

For example, saying that a boat is “seaworthy” is like a used car salesman saying that an old car it’s in “great condition.” In some contexts, such as a maritime personal injury claim, “seaworthiness” is a legal term that will be a significant factor in the case. However, in boat sales, it is a subjective term that has no particular legal significance, because of the extent to which that term is used.

This is different than, for example, misrepresenting the length of a boat or the horsepower of the engine, which are objective facts. If those were subjective terms, you could never hold someone liable for their use.

The best approach is to avoid the dispute altogether by doing some homework before entering the market in the first place. Buying a used boat gear may be a complicated endeavor, but the process can be simplified enormously through a little preliminary research into the make and model of the article.

March 1, 2010

The Smith Manoeuvre

Filed under: Finance — Rafael Minuesa @ 3:06 PM
Tags: ,
This is one of a series of articles I posted at the Mortgage Girl Blog.
You can view the original version at: 

The Smith ManoeuvreOn October 27th, 1988, John Singleton had $300,000 in his business capital account and he wanted to use $300,000 of his equity to assist in the purchase of a house. He then borrowed that same amount, in the form of a mortgage on the real estate he just purchased, to refinance his partnership capital account. Because he was now investing the money in the firm instead of the house, the interest on the loan became tax-deductible. He did all those operations on the very same day, and as a result, Singleton got a new house, a mortgage on the new house, and $300,000 back in his capital account.

Singleton deducted the mortgage interest on his 1988 and 1989 tax returns but the government disallowed the deduction. After Singleton sued, he lost in the Tax Court of Canada but won the appeal in the Federal Court of Appeals and in October 2001 the Supreme Court of Canada ruled that,

“It is an error to treat this as one transaction – the transactions must be viewed independently.”

As Singleton recalls,

“The Court said the act said I can do what I did, and [Revenue Canada] had no right to look behind what I did to see whether or not it was a sham, which is what they kept calling it. If the act says you can do it, then you can do it and deduct it. End of story, nice and simple, which was our position throughout.”

The implications of that resolution are that structuring your affairs to shrink your tax burden is 100% legal, since the Courts have ruled that Singleton could write off his mortgage interest and that has paved the way for homeowners, who apply the same principles, to make non-deductible principal mortgage interest tax deductible.

What Singleton did was actually a variation of the so-called Smith Manoeuvre, a strategy also known as “leveraging” that Fraser Smith developed after years of watching wealthy Canadians get away with the trick, while the vast majority of citizens laboured for years to pay off their mortgage and wound up entering retirement with empty pockets.
As he said,

“This is for all those people who would like to be wealthy but who are getting killed both by their mortgages and by income taxes.”

Most people do not write off the interest on their mortgage. Although many homeowners write off a portion of their mortgage payment as it relates to a home office space, that is not the same as writing off the interest on their mortgage.

Your principal homes mortgage interest is deductible, when the borrowed money is used to earn income from a business or investment that has an expectation of making a profit, even if your home is the pledged security. How the funds are spent determines interest deductibility of your mortgage, not the collateral. If a direct link can be established between the loan and its business use, it is irrelevant that the security for the loan is a mortgage against your principal residence.

And, what’s more, as long as you pay the tax-deductible interest to the institution that loaned you the money to invest, you never have to pay back the principal. It’s a debt you can die with if you want, at which point the money will be paid back out of your estate.

So, is the Smith Manoeuvre right for you?
According to Fraser Smith, it is the right Manoeuvre if:

a) you own more than 25 per cent of your home,
b) you’re capable of living within your means and using your tax savings to pay down your original mortgage.

Obviously, if you’re close to retirement and the house is paid off, it’s not for you. But, if you’ve got some idle equity in your home and you’d like to free up some cash up to do some investing, this might be the right time to do some manoeuvring.

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