Chinese Housing Bubble

Back in 2017, we explained why the “fate of the world economy is in the hands of China’s housing bubble.” The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth would keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting “wealth effect”, in China it has always been about housing as three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US, with the remainder invested financial assets.

Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, “smooth landing” process. For now, Beijing has been successful in maintaining price stability at least according to official data, allowing the air out of the “Tier 1” home price bubble which peaked in early 2016, while preserving modest home price appreciation in secondary markets.

How long China will be able to avoid a sharp price decline remains to be seen, but in the meantime another problem faces China’s housing market: in addition to being the primary source of household net worth – and therefore stable and growing consumption – it has also been a key driver behind China’s economic growth, with infrastructure spending and capital investment long among the biggest components of the country’s goal seeked GDP. One result has been China’s infamous ghost cities, built only for the sake of Keynesian spending to hit a predetermined GDP number that would make Beijing happy.

Meanwhile, in the process of reflating the latest housing bubble, another dire byproduct of this artificial housing “market” has emerged: tens of millions of apartments and houses standing empty across the country.

According to Bloomberg, soon-to-be-published research will show that roughly 22% of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That amounts to more than 50 million empty homes.

The reason for the massive empty inventory glut: to keep supply low and prices artificially elevated by taking out as much inventory off the market as possible. This, however, works both ways, and while it helps boost prices on the way up as the economy grow and speculators flood the housing market with easy money, the moment the trend flips the spike in supply as empty units are offloaded will lead to a panic liquidation of homes, resulting in what may be the biggest housing market crash ever observed, and putting the US home bubble of 2006 to shame.

Indeed, as Bloomberg notes, the “nightmare scenario” for Chinese authorities is that owners of unoccupied dwellings rush to sell when cracks start appearing in the property market, causing a self-reinforcing downward price spiral.

Worse, the latest data, from a survey in 2017, also suggests Beijing’s efforts to curb property speculation – which alongside shadow banking and the persistent threat of sudden bank runs (like the one discussed last week) is considered by Beijing a key threat to financial and social stability – have failed.

“There’s no other single country with such a high vacancy rate,” said Gan, of Chengdu’s Southwestern University of Finance and Economics. “Should any crack emerge in the property market, the homes to be offloaded will hit China like a flood.”

How did the Chinese researcher obtain this troubling number? To find the percentage of vacant housing, thousands of researchers spread out across 363 Chinese counties last year as part of the China Household Finance Survey, which Gan runs at the university.

Gan said that the vacancy rate, which excludes homes yet to be sold by developers, was little changed from a 2013 reading of 22.4%. And while that study showed 49 million vacant homes, Gan puts the number now at “definitely more than 50 million units.“

Meanwhile, Beijing – which is fully aware of these stats, and is also aware that even a modest price decline could be magnified instantly as millions of “for sale” units hit the market at the same time – is worried. That’s why Chinese authorities have imposed buying restrictions and limited credit availability, only to see money flooding into other areas. Rampant price gains also mean millions of people are shut out from the market, exacerbating inequality.

In fact, China’s president Xi famously said in October last year that “houses are built to be inhabited, not for speculation”, and yet a quarter of China’s housing is just that: empty, and only serves to amplify speculation.

While holiday homes and the empty dwellings of migrants seeking work elsewhere account for some of the deserted properties, Gan found that investment purchases have been the biggest factor keeping the vacancy rate high. That’s despite curbs across the country meant to discourage buying of multiple dwellings.

There is another economic cost to this speculative frenzy: the drop in supply puts upward pressure on prices and crowds young buyers out of the market, according to Kaiji Chen, who co-authored a Fed paper called “The Great Housing Boom of China.”

And, as Americans so fondly recall, the result of chasing unaffordable homes for the purpose of price speculation has resulted in yet another unprecedented debt bubble: according to Caixin, outstanding personal home mortgages in China have exploded seven fold from 3 trillion yuan ($430 billion) in 2008 to 22.9 trillion yuan in 2017, according to PBOC data

By the end of September, the value of outstanding home mortgages had surged another 18% Y/Y to a record 24.9 trillion yuan, resulting in a trend that as Caixin notes, has turned many people into what are called “mortgage slaves.”

It has also resulted in yet another housing bubble: home mortgage debt now makes up more than half of total household debt in China. As of the third quarter, it accounted for 53% of the 46.2 trillion yuan in outstanding household debt.

For now, few are losing sleep over what will be the next massive housing bubble to burst. An example of a vacant home is a villa on the outskirts of Shanghai that 27-year-old Natalie Feng’s parents bought for her. The two-story residence was meant to be a weekend escape for the family of three. In reality, it’s empty most of the time, and Feng says it’s too much trouble to rent it out.

“For every weekend we spend there, we need to drive for an hour first, and clean up for half a day,” Feng said. She joked that she sometimes wishes her parents hadn’t bought it for her in the first place. That’s because any apartment she buys now would count as a second home, which means she’d have to make a bigger down payment.

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What is troubling is that despite relatively stable home prices, the foundations behind the housing market are cracking. As the WSJ recently reported, in early December, a group of homeowners stormed the sales office of their Shanghai complex, “Central Washington”, whose developer, Shanghai Zhaoping Real Estate Development, was advertising new apartments at a fraction of the prices of the ones sold earlier in the year. One apartment owner said the new prices suggested the value of the apartment she bought from the developer in March had dropped by about 17.5%.

“There are people who bought multiple homes who are now trying to sell one to pay off the mortgage on another,” said Ran Yunjie, a property agent. One of his clients bought an apartment last year for about $230,000. To find a buyer now, the client would have to drop the price by 60%, according to Ran.

Meanwhile, in a truly concerning demonstration of what will happen when the bubble finally bursts, last month we reported that angry homeowners who paid full price for units at the Xinzhou Mansion residential project in Shangrao attacked the Country Garden sales office in eastern Jiangxi province last week, after finding out it had offered discounts to new buyers of up to 30%.

Country Garden cut the selling price at one of its residential developments by 1/3. Those who paid full price smashed the sales office. Similar incidents had happened before, and will again. It’s impossible to remove “the guarantee of principal”（刚性兑付）in China. pic.twitter.com/UxHFODYxmc

— Hao Hong 洪灝, CFA (@HAOHONG_CFA) October 6, 2018

“Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities. “People are so used to rising prices that it never occurred to them that they can fall too. We shouldn’t add to this illusion,” Shao added, echoing Ben Bernanke circa 2005.

But the biggest surprise once the music finally stops may be that – as a fascinating WSJ report revealed one year ago – China’s housing downturn is likely far, far worse than meets the eye, as under Beijing’s direction more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China’s Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020. The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market.

In other words, while China already has a record 50 million empty apartments, the real number – when excluding the government’s own stealthy purchases of excess inventory – is likely significantly higher. It is this, and not China’s stock market, that has long been the biggest time bomb for Beijing, and if Trump and Peter Navarro truly want to crush China in their ongoing trade war, they should focus on destabilizing the housing market: the Chinese stock market was, and remains just a distraction.

To summarize:

China has more than 50 million vacant apartments
Mortgage loans have grown 8-fold in the past decade
Prices are kept steady thanks to constant government purchases of surplus inventory
Home prices are already cracking, with some homebuilders forced to cut prices by 30%.
Homebuyers revolt, forming angry militias and storm homesellers’ offices when prices dip

For now, China has been able to maintain the illusion of stability to preserve social order. However, should the housing slowdown accelerate significantly and tens of millions in empty units suddenly hit the market, then the “working class insurrection” that China has been preparing for since 2014…

… will become an overnight reality, with dire consequences for the entire world.

Source: ZeroHedge

“The Numbers Are Hard To Believe”

Even before the latest Chinese home price data was released overnight, it was a pure bubble-buying frenzy.

As Chris Watling, the CEO of Longview Economics, told CNBC Thursday, “I think what’s going on in China is troubling … some of the valuations there are really quite extraordinary… We’ve double checked these numbers about seven times, because I found them quite hard to believe.“

What Watling found is that housing in major cities in China has seen price hikes over the last year that resemble the famous Dutch “Tulip Fever” bubble of 1637, according
to new research by economic consultancy firm Longview Economics: the firm found that only San Jose in the Silicon Valley is more expensive than Shenzhen. The Chinese city has seen prices rise 76% since the start of 2015, with the acceleration beginning in April 2015 as the country’s stock market was nearing its peak. The situation in Beijing and Shanghai is similar, albeit less extreme, the company states.

According to Watling, the typical home in Shenzhen costs approximately $800,000. Watling said that the house-income ratio in Shenzhen is now running at 70 times, compared to around 16 times in somewhere like London.

“Housing in some of the tier 1 cities is more expensive than it is in London, which I think itself is on a bubble, Watling added. “The (stock) market exploded to the upside and then crashed dramatically. That money had to go somewhere, so it washed around the system … so a lot of it has gone into housing.”

China, the biggest economic story of the last 30 years, has soured in the eyes of many analysts. A stock market crash that began in the country last summer has highlighted the vast difficulties Chinese lawmakers are now facing. Watling said Chinese housing was a story built on credit, lots of liquidity and lots of debt. He added that all bubbles, though, once established, will eventually burst and deflate.

It will, but not yet.

According to the latest Chinese housing data released overnight, Chinese home prices rose the most in more than six years last month, suggesting local government efforts to avert a housing bubble are having only a limited effect according to Bloomberg. Average new-home prices in the 70 cities rose 1.2% in August from July, the biggest increase since Bloomberg started tracking records in January 2010. The value of home sales jumped 33 percent last month from a year earlier, the fastest pace in four months.

“Price growth accelerated in cities all of tiers,” the statistics bureau said in a statement released with the data. Almost half of the cities where prices increased had larger gains than in July, it added.

New-home prices, excluding government-subsidized housing, in August gained in 64 of the 70 cities the government tracks, compared with 51 in July, the National Bureau of Statistics said Monday. Prices fell in four cities, compared with 16 a month earlier, and were unchanged in two.

As Bloomberg notes, the jump in home prices comes in spite of lending curbs which have spread from major cities such as Shanghai and Shenzhen to regional hubs. That may may lead to further restrictions as policymakers become increasingly concerned about averting an asset bubble, said Xia Dan, a Shanghai-based analyst at Bank of Communications Co.

More importantly, Standard Chartered head of Greater China economic research Ding Shuang the latest surge in Chinese property prices in August suggests further broad-base easing by the PBOC is unlikely this year. He added that the home prices divergence continues with tier 1 and tier 2 cities overheating, whereas smaller cities are struggling to reduce inventory. As a result, Shuang expects PBOC to keep monetary policy prudent; and sees no further interest rate cut for the rest of the year. He also believes the Chinese government will introduce more curbs in major cities, such as a higher down-payment as mortgage loans are growing quickly

Hangzhou, Zhejiang’s provincial capital, on Sunday halted home sales to some non-local residents, adding to similar restrictions introduced last month in Suzhou and Xiamen. China’s top leaders, after a Politburo meeting led by President Xi Jinping, in July pledged to curb asset bubbles amid a renewed focus on financial stability.

However, for most Tier 1 cities, the curvs are having zero impact: prices climbed a record 4.4 percent and 3.6 percent in Shanghai and Beijing respectively, taking the year-on-year gains to 31 percent and 24 percent. Values rose 2.1 percent in Shenzhen and 2.4 percent in Guangzhou, both faster than a month earlier. Home prices climbed the fastest in regional hubs where local authorities haven’t introduced curbs. Zhengzhou, the provincial capital of central Henan province, led gains with a 5.5 percent increase, up from a 2 percent gain in July. Prices in Wuxi, a manufacturing base in southern Jiangsu province, followed with a 4.9 percent gain, compared with 2.7 percent a month earlier.

Some more details from Goldman:

Housing prices in the primary market increased 1.6% month-over-month after seasonal adjustment (weighted by population) in August, higher than the growth rate in July. Almost all cities saw price increases in August from July: Out of 70 cities monitored by China’s National Bureau of Statistics (NBS), 66 saw housing prices increase in August from the previous month (58 in July, on a seasonally-adjusted basis).

On a year-over-year, population-weighted basis, housing prices in the 70 cities were up 9.7% (vs. 8.3% yoy in July).

House price inflation accelerated across all tiers in August. In tier-1 cities, August price growth showed a spike to 3.5% month-over-month after seasonal adjustment, the largest price increase since the series started in Jan 2011. (Total property sales in tier-1 cities accounted for around 5% of nationwide property sales in volume terms.) August housing price growth was also at record high levels in tier-2 and 3 cities, with prices increasing at 1.8% mom sa and 1.1% mom sa respectively. The fast extension of mortgages likely contributed to the housing price rally – in August mortgage loans continued to be strong: medium- to long-term new loans to the household sector were Rmb 529bn, vs. Rmb 477bn in July. (see China: August money and credit data above expectations, reflecting supportive policy, Sep 14, 2016) In response to the fast growth of housing prices, many cities (such as Hangzhou, Suzhou, Xiamen, Zhengzhou) have announced tightening policies to curb the rapid price growth.

Finally, the main reason why tightening measures by local governments are unlikely to rein in prices is that credit remains easily attainable, said Jeffrey Gao, a Hong Kong-based property analyst at Nomura Holdings Inc. “The local curbs have limited impact as home inventory has already fallen to a low level,” Gao said. “Prices will not fall unless the government moves to tighten credit and add more land supply.”

Chinese authorities are facing a monetary policy dilemma amid “rapid” home-price growth, Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note Monday. “The overall monetary policy should remain accommodative as inflation remains subdued and growth is still trending down. However, concern about an asset bubble will limit room for further easing.”

And, as we showed two weeks ago, the Chinese housing situation is likely to get even more bubbly in the coming weeks as mortgage loans as a % of total loans, the primary culprit behind the ongoing price surge, continues to rise to all time highs.