It’s Easy to Buy a House – in China

In my opinion, the greatest current threat to the US housing market is, ironically, not within the US.

Do you recall the fear that gripped our financial markets toward the end of last year, causing turbulence and a lot of red ink, for several months?

In November of 2015, the DOW peaked just shy of 18,000.   By January 29th, it fell to a low of 15,450 – an almost 14% decline.  Doesn’t sound like much, right?  Well, let me say it another way:  The ‘total value’ of the companies listed on the NYSE is about $20 trillion.   So, about $2.8 trillion in stock value was lost in just a couple of months.

Rest assured, this isn’t unusual.  Fear and volatility are commonplace in the stock market.  And the majority of the ‘loss’ has now been recovered.  Phew.

A better question is what caused this particular volatility?   This particular loss?

China.  The problem is two-fold.   China is now the world’s 2nd largest economy – behind the US.  If China’s GDP stumbles, or worse, goes into a recession there’s a very real threat that many other countries will follow suit.   And the resultant ‘contagion’ might then drag the US into a recession.

The second part of this problem are the numbers themselves.  We simply cannot rely on the veracity of government-produced numbers from China.  Sure, they’re probably ‘close’ to reality, but their published numbers lack the vigorous and consistent methodologies we’re used to seeing here in the US.   Or in Europe.  Or, frankly, pretty much anywhere else.

So we do the best we can.  Back to housing….

Another casualty of the fear gripping the financial markets in November, December and January may have been the US resale housing market.  About 10 days ago, the National Association of Realtors reported sales of existing homes fell unexpectedly, in February, by 7.1%.  This followed increases in December and January of 12.1% and 0.4%, respectively.

Many economists feel the stock market plunge was responsible, at least in part, for the February ‘existing home sales’ slow down.

If a bout of fear can cause this kind of ripple, what might truly derail the Chinese economy?  Thereby affecting ours…and our housing markets?

Early in 2015 I made a ‘wildcard’ prediction. Here’s what I published:

“The Chinese new home market will finally crash. Sales and prices will plummet. But we may not know it. The chart (below) shows new home value trends from 2011 to EOY 2014. The data source is the “National Bureau of Statistics of China,” an agency with little credibility or accuracy. Looking thru the ‘rose colored glasses’ one must wear when assessing Chinese statistics, the crash may have already happened. (Meaning: Actual results may be much worse than shown.) Global implications? Well, about 15% of China’s GDP is driven by housing. China’s GDP is now about $10 trillion (US GDP is about $18 trillion; European Union-$14 trillion) so a large hiccup here (if we know about it) could have meaningful impact on the global economy.”

Apparently I was wrong about a couple of things:  According to The Economist magazine, in an article published March 12 entitled ‘For whom the bubble blows’:  “…Construction has long been one of the economy’s main engines, accounting for as much as a quarter of GDP growth until recently. This makes it especially important that the government get the balance right. Doing so is proving hard.”

It appears I underestimated the importance of construction:  if 25% of the Chinese GDP is housing/construction related, the problem could be even more serious.

I also may have been too aggressive in the timing of my forecast.  Problems like this seem to take longer to ‘tip over’ than we expect.

The bottom line:  The Chinese housing market is WAAAAAAAY overbuilt.  In that same Economist article, “Figures from the China Index Academy, a data provider, show that the stock of unsold homes has decreased recently, from nearly 30 months’ worth of sales early last year to 15 now.”  OK…this is good.  Absorption is good.  But the story doesn’t end there. 

Here’s the graphic, produced by www.tradingeconomics.com, that I posted at that time:

And here is the recently updated graphic directly from the www.tradingeconomics.com site:

Interestingly, by the new graph the trajectory of ‘newly built’ house prices seems to have improved.   Again, this is good.  But, once again, the story doesn’t end there.

Because the price increases seem to be limited to five HOT cities, where there is a serious supply/demand imbalance.  In fact, these markets aren’t just hot…they’re on fire:

Look at the Shenzhen price increases in the past year of so.   Staggering.

Per The Economist magazine, “Over the past half-year, the government has unveiled a series of measures to support the housing market that specifically exclude China’s five hottest markets (Beijing, Guangzhou, Sanya, Shanghai and Shenzhen). People buying homes need only make a 20% down-payment to obtain a mortgage, except in the five conurbations, where they must put down 30%. By the same token, in most of the country transaction taxes have been cut by as much as two-thirds for people buying second homes; in the five outliers they have been left unchanged. In Shenzhen, a southern tech hub that is the frothiest market, with prices up by 53% in the past year alone, local officials have vowed to crack down on speculators and expand the supply of affordable housing.”   Can you say ‘bubble?’

According to a March 9th article in the NY Times by Owen Guo entitled, “Awash in Empty Homes, China Asks Migrant Workers to Settle Down”:

“The housing glut is one of the biggest drags on China’s economy, and therefore one of the major drags on global growth. The empty homes have discouraged further investment in real estate, idling cranes and construction workers around the country.”

Here’s where the government data problem becomes apparent.  Per Mr. Guo:

“The precise size of the housing glut is unclear. China nationally tracks square meters available for sale. Government data shows that the space in unsold residential units reached a high last year at 452 million square meters.”

And according to The Economist:

“…but there is a further vast increment of supply on the verge of coming to market, because developers slowed the pace of construction in recent years and in some cases halted it altogether. There were 4.7 billion square metres of housing under construction but not yet available for sale at the end of last year, up by 25% from the end of 2011; 452 million square metres of housing were on sale, nearly three times as much as at the end of 2011.

Note that the amount of ‘housing not yet available for sale’ is 10 TIMES the current glut.   Which is further exacerbated by the fact that the majority of the excess is NOT located in where demand is.   Hmmm….

And now, Chinese leaders seem mostly preoccupied with the backlog of unsold homes.

Chinese President Xi Jinping said in November, “destocking the property market” and “promoting the sustained development of the (housing) sector” were important tasks for the coming year.

Changjiang Daily, an official newspaper in the central city of Wuhan, likened the task of unloading vacant homes to “a battle of annihilation.”  One plan being considered:  Some Chinese provinces and cities are drafting plans to convert unsold homes into subsidised housing for poorer residents.  There are hundreds of millions of ‘migrant workers’ for whom this plan might work.   We’ll see.

Per Mr. Guo, the pressure is on: “One Chinese provincial government has warned county- and city-level officials that they will be “held accountable” if they fail, without specifying the penalties.”   Held accountable?   What does this mean?  Jail time?  The death penalty?   Well, hey, it’s China.  Who knows?   

As a direct result, in smaller, more rural cities, governments are subsidizing housing and ‘easy commercial bank loans’ are being made available to migrant workers.   Hmmm….

The bottom line?   They have a serious problem China.  In the larger, wealthier cities, shortages are commonplace and prices are skyrocketing.  Bubbles may be developing.   In less desirable areas, excesses abound.    We’ve all seen what happens when lending standards fall too far….   Here in the US, we’ve learned that lesson.

But it’s a huge country with amazing resources and about 1.4 billion people.  Perhaps they can solve this one.

So let’s keep a close eye on housing in China.  As it could be a source of global economic contagion, impacting the economies of developed countries, it’s worth the effort.

• Terry Liebman