Risks Of Buying Property Off-Plan, People’s Bank Of China Announcement on Evergrande Scandal
Risks Of Buying Property Off-Plan, People’s Bank Of China Announcement on Evergrande Crisis
The Chinese government has calmed fears that Evergrande could be allowed to fail and risk world economic recovery.
On Monday, without actually mentioning Evergrande, China’s central bank promised to protect consumers exposed to the housing market.
The announcement by the People’s Bank of China has been seen as a sign that authorities are ready to take steps to prevent the potential catastrophe of Evergrande’s crisis spreading to other parts of the economy.
Evergrande has debts of around $300 billion to national and international creditor including bondholders and 171 domestic banks plus 121 other financial firms. There are also over a million customers who have paid for properties yet to be built and thousands of supplies and staff.
If the company is allowed to fail it could bring down banks and cause a credit crunch squeeze on lending similar to the 2008 global financial crisis.
China’s economy matters to the rest of the world, as it drives demand and spending. For instance, a slowdown in construction alone would hit Australia’s exports of Iron Ore, which represents a large part of it’s currently locked down economy.
This week, Goldman Sachs became the latest bank to downgrade China’s growth forecast from 8.2% to 7.8%.
Chinese buyers have also been scooping up overseas property everywhere from London to Manila, Sydney, Auckland and Toronto where prices have hit all-time highs this year.
Much of China’s massive growth appears to have been funded by huge amounts of debt, something which the government has attempted to reign in recently. This has forced property companies to tighten their belts and the first problem to come to light is the biggest of them all Evergrande.
The conglomerate has 1300 projects in 300 cities spread across the country. Desperate property buyers have been demonstrating outside Evergrande’s offices. Many have invested their life savings and now fear they many never see their money, or the apartment they bought ‘off-plan,’ again.
Buying property off-plan can be risky. Whilst you might think you are getting a ‘below market value’ deal, you are taking the developers word that the finished property, usually a high-rise apartment, will be worth more than you have paid for it several years down the line.
You are also relying on the builder’s ability to finish the project, as well as quality and ongoing management.
Developers normally retain control of the freehold and management of the building and will enjoy residual income from often unfair management charges for the lifetime of your lease.
Buying off-plan properties abroad is especially risky in countries where you don’t understand local laws and taxes.
People often fail to use a lawyer when buying and overseas property, something they would never do at home!
The key to any investing is education or knowledge, something you were not taught in school!
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