Skip to comments.China’s Housing Market Is Looking Ugly, Which Is Scary for its Financial System
Posted on 02/05/2014 1:16:44 PM PST by nickcarraway
Chinas surging property market might finally have hit the skids. + Sales have showed a sharp decline (paywall) in January, compared to Dec. 2013, according to China Confidential, a Financial Times research outfit, even when controlling for softness due to the Chinese New Year holiday. Official data show prices still high in December (the last month for which data were available), but those will likely be dragged down in the coming months. +
A big blow to global markets
Housing investment is a big engine of Chinas economy. And though slower growth could help end Chinas dangerous reliance on credit-backed investment, an abrupt slowdown will freak out global markets and throttle commodity prices. + Devastating for Chinas financial system
Property-sector loans accounted for one-third of total loans last year, equaling $380 billion. A slowdown would mean that real estate developers, many of whom borrow through shadow finance channels, would struggle to pay back retail investors who effectively loaned to them via wealth management products (more on those here). A lot of that investment has flowed one way or another through Chinas shadow banking system, the unregulated credit that allows banks to shunt loans to dodgy borrowers. + But the threat to Chinas financial system is much broader than that. Untold billions in corporate borrowing are supported by property used as collateral. Theres a cottage industry of auditors willing to appraise unoccupied or under-development property at whatever value is deemed necessary to get a bank manager to extend a loan. (In many cases, the borrower will turn around and lend to another business at a higher interest rate.) The fact that prices keep going up means theres nothing challenging those face-value assumptions. A slump in prices would put a big dent in the value of that collateral. +
Prices climbed in 2013, even as the government tried to curb demand. A nightmare for Chinese households
Because the Chinese government doesnt let households invest in much else, they hold an inordinate amount of their savings in propertymore than 66% of family assets were tied up in housing last year, according to Bloomberg. + Mortgage debtsomething that many assume is low in Chinanow claims a 30% share of disposable income, up from 18% in 2008, reports Bloomberg. And thats just official mortgages; bankers have lately been extending mortgages through other forms of consumer loans. + A fall in housing prices could have significant knock-on effects on private consumption, Eswar Prasad, a Cornell University professor, told Bloomberg. Such a hit to private consumption could pose significant macroeconomic risks, both to headline growth and the process of rebalancing growth. + A housing market recovery is also likely to be much more excruciating than, say, the USs, since renting erodes a homes resale value. China has a distressingly huge oversupply of housing, as we reported in Oct. 2013; in some cities home ownership could be as high as 200%. Worse, the rapid pace at which Chinas population is aging is likely to douse demand even more.
That's a puzzling statement. They have a choice of domestic bonds, stocks and "wealth management products", aka unit trusts. Many have chosen to invest in foreign real estate, bonds and stocks. Real estate is skyrocketing partly because the government owns most of the land available for development and auctions it out very gradually in order to keep raw land prices up, since a lot of government revenue comes from land sales. Another big factor is skyrocketing Chinese wages. Chinese GDP per capita went from 2/3 Indian levels in 1979 to 4x in 2012, a number reflected in the fact that Chinese vehicle sales were 10x the Indian number in 2013. Given the way local (Lenovo, Huawei, et al) and well as foreign investors are upgrading their Chinese presence, I'd expect the real estate boom to go on for decades. Ultimately, the rapid increases in pay combined with a fanatical savings culture bolstered by a near non-existent welfare state means that real estate (and other financial assets) are on course for a multi-decade boom, much like the Japanese miracle years. The Japanese bubble bolstered not just the Japanese market, but markets everywhere. Until Chinese economic development hits the wall a few decades down the road, China will remain the principal source of growth driving the world economy and financial asset pricing everywhere.
Chinese property stories are no different from Japanese property stories in 1989.
Simple apartments costing 15+ years of income, families scrimping to just make down-payments, having an apartment has become a man’s best prospect to find a wife, mortgages at huge percentages of disposable income, rampant speculation.
I assume it will end the same way also.
Real estate, by comparison, is safer..you can actually see the structure...count the bricks..
The problem with Chinese real estate is valuation. It's a crowded trade. However, if the experience of other ethnic Chinese dominated societies like Hong Kong, Taiwan and Singapore is any guide, China's real estate boom has a long way to go yet. We have gold bugs - they have real estate speculators. Over the long term, I think the land guys will win out, because gold just sits there, whereas land can be developed and rented out.
The big difference is that Chinese GDP per capita growth is a long way from slowing down, as the Japanese number did in the late 80's, once it caught with, and briefly surpassed the US number.
Because the Chinese government doesnt let households invest in much else, they hold an inordinate amount of their savings in propertymore than 66% of family assets were tied up in housing last year, according to Bloomberg.
That’s a puzzling statement. They have a choice of domestic bonds, stocks and “wealth management products”, aka unit trusts. Many have chosen to invest in foreign real estate, bonds and stocks. Real estate is skyrocketing partly because the government owns most of the land available for development and auctions it out very gradually in order to keep raw land prices up, since a lot of government revenue comes from land sales.
Read Pearl S. Buck’s novel “The Good Earth”. It might seem outmoded and of a time before Mao and the PRC but the attitudes about the land ring true even unto today.
The names of the people might change but the types of people stay the same through the generations. And the Chinese peasant valued land over all other things and it brought a continuity down through the generations.
Even though Buck was an outsider, the daughter of an American missionary, I think her book captures a lot that is true about the 20th century Chinese experience, based on what I've read from other sources. As a non-Chinese observer of the Middle Kingdom, I am struck by how, starting in 1979, raw capitalism seems to have risen from the dead and gone from strength to strength, such that it has now surpassed the economies of many of its neighbors to the south that never went through a communist phase (India, Indonesia, Philippines, et al). It is as if central economic planning had not existed in the prior 30-year period (1949-1979) of landlord massacres and cockamamie Maoist economic schemes (village steel mills, pet and bird extermination programs, et al). In the 30-odd years since 1979's economic liberalization, China has gone from the bottom 10 out of about 200 economies in terms of per capita GDP, to the top half of that list. All this on the strength of the animal spirits unleashed by the re-establishment of property rights, the decriminalization of the profit motive and the reform of the labor market that required Chinese workers to fend for themselves in the labor marketplace instead of being assigned jobs by central planners at state-owned enterprises and local collectives.
I suspect for decades hence, they will continue putting their surpluses into land investments, because the availability of leverage means that's a sure bet until the country's growth slows down to a crawl. The only thing that might derail this scenario is political instability. However, I think that possibility is low. Maybe I'm wrong, but I believe that Mao, while still worshiped as the Chinese Messiah, is only worshiped in the way the average Christian worships Jehovah - just as no one thinks adulterers should be stoned or idol worshipers should be killed, the average Chinese worships Mao without subscribing to his economic beliefs.
It's not just Chinese. Any survey of history shows that the most powerful aristocrats and kings were the ones who owned the most land. Britain's richest blue bloods owned vast tracts of land. Owning land requires no creativity, and always throws off some income from rent. It's the ultimate passive investment.
I cannot understand why anybody could possibly find housing to be an "engine" of the economy. Housing is a consumer good and if housing is down, it can only be because people aren't working or don't have the money to buy more.
Housing is a result of economic conditions; not a cause.
What the politicians don’t see is that China may not be able to buy our debt in the near future considering the slowdown in their economy.