by Umar Farooq
China, which still is the biggest contributor to global growth, has been looking shaky for a couple of years now. Growth is down from insanely fast to moderately fast. The stock market rose and crashed. Liquidity problems have been common in the banking sector, and a lot of money has flowed out of the country. So far, through all of this turbulence, growth has managed to hold up — or at least it has, according to the official statistics. But it’s the housing sector that will really make or break the country’s economic destiny. Prices fell in 2014 and early 2015, and it looked as if the long-promised Chinese housing crash had finally arrived. But then prices recovered, as they did after another smaller fall in 2011 and 2012. Now they’re on the rise again. The graph below represents the average residential property prices year over year in 70 top Chinese cities.
If a true crash ever does come, it may well be disastrous. China doesn’t have well-developed stock markets, so households save a lot of their money, directly or indirectly, in housing and land. Much of the economy itself is based on real-estate development. Land also tends to be highly leveraged, and asset-prices crashes that involve lots of debt tend to be devastating for growth. So Chinese housing prices are hanging like an economic Sword of Damocles over the head of the global economy.
Some Chinese analysts have been even more vehement. “The dangers of overly inflated housing prices are huge,” writes Hu Shuli, chief editor of Caixin Media in Beijing. “Indicators such as the ratio of mortgage payments to a buyer’s income indicate that on a relative basis,
China’s current housing prices are now more expensive than those during Japan’s property bubble, and are close to U.S. prices just before the global financial crisis exploded.” Prices in real estate has surpassed purchasing power of the Chinese middle class.
China has been dependent on credit growth to reach its economic development forecasts of 6% for years now. These loans have had the effect of creating distortions and stresses in the banking system, contributing to bubbles in asset prices, not to mention oversupply in numerous sectors. Solar panels and automotive sector oversupply comes to mind. This has also been a problem in real estate, still considered the favored bank account of individuals in China.
“The new year could be a tough one for China’s highly leveraged real estate developers, as $17.3 billion worth of bonds come due next year at a time when developers are not selling any new notes. Developers have turned to the Shanghai Stock Exchange to sell bonds that financed about 40 percent of onshore debentures over the past two years, according to Bloomberg.
But they haven’t sold any new bonds since October when regulators raised the threshold for developers to sell bonds on the exchange in order to deflate its real estate bubble. This comes at a time when a record $17.3 billion of developer bonds are set to come due next year, with another $27.9 billion due in 2018.” The real deal
“Housing prices are an extremely sensitive matter right now,” a second source with knowledge of the matter told Reuters. Perhaps the reason is that having created a massive bubble to the upside, Beijing is hoping to delay the descent in prices in order to attain a smooth landing at a time when China is already faced with record capital outflows, a plunging currency and all time high levels of debt.” Tyler Durden
Many analysts are forecasting that this bubble in the real estate markets of China is signifying a serious trouble for the Chinese economy and ultimately for the globe. This might not be material if the rest of the world were expanding strongly. But much of the rich world is hardly growing at all, so China accounts for nearly half of all global GDP growth. If an inflating real estate bubble—and the reluctance of China’s leaders to introduce sincere reforms—lead to a major slowdown in East Asia, it could be a problem that infects the global economy as a whole.