Could China's Housing Bubble Bring Down The Global Economy?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Who's going to buy the tens of millions of empty flats held as investments?
I've been writing a lot about China recently because it's becoming increasingly clear that China's economy is slowing and the authority's "fixes" are not turning it around. That means the engine that pulled the global economy out of the 2009 recession has stalled.
Many people see China's slowdown as the source of the next global recession, but few seem to realize the extreme vulnerability of China's vast housing market and the many knock-on consequences of that market grinding to a halt.
I've just completed a comprehensive review of China's housing market, and now realize it's much worse than the consensus understands.
The consensus view is: Sure, China's housing prices are falling modestly outside of Beijing and Shanghai, but since Chinese households buy homes with cash or large down payments, this decline won't trigger a banking crisis like America's housing bubble did in 2008.
The problem isn't a banking crisis; it's a loss of household wealth, the reversal of the wealth effect and the decimation of local government budgets and the construction sector.
China is uniquely dependent on housing and real estate development. This makes it uniquely vulnerable to any slowdown in construction and sales of new housing.
About 15% of China's GDP is housing-related. This is extraordinarily high. In the 2003-08 housing bubble, housing's share of U.S. GDP barely cracked 5%.
Of even greater concern, local governments in China depend on land development sales for roughly 2/3 of their revenues. (These are not fee simple sales of land, but the sale of leasehold rights, as all land in China is owned by the state.)
There is no substitute source of revenue waiting in the wings should land sales and housing development grind to a halt. Local governments will lose 2/3 of their operating revenues, and there is no other source they can tap to replace this lost revenue.
Since China authorized private ownership of housing in the late 1990s, homeowners in China have only experienced rising prices and thus rising household wealth--at least until very recently, when prices dipped as the government tightened lending standards and imposed some restrictions on the purchase of flats as investments.
Though it's difficult to quantify the "wealth effect" the rapid rise in housing valuations supported, it's widely acknowledged that upper-middle class household spending has increased as a direct result of housing's wealth effect.
Though few dare acknowledge it, prices in desirable first-tier cities urban cores are completely unaffordable to average households. Average flats in Beijing now cost 22X annual household income -- roughly six times the income-price ratio that is sustainable (3 or 4 X income = affordable cost of a house).
Far too many observers use housing prices and sales in Beijing and Shanghai--a mere 3.5% of China's population and housing stock--as the basis of entire nation's housing market. This is akin to judging America's housing market on prices and sales in Manhattan.
So while sales are soaring in Beijing, they're falling 26% in the 2nd, 3rd and 4th tier cities.
Though it is widely known that China's household wealth is concentrated in housing, the extent and consequences of this concentration are rarely discussed.
Much has been made of the $3+ trillion losses households have suffered as China's stock market bubble collapsed. But given the relatively insignificant role financial assets play in household wealth, these losses are modest compared to the far larger loss of household wealth that will occur as housing deflates from bubble heights.
Many people claim the estimated 65 million empty flats held as investments by the middle and upper classes in China will be sold to new buyers in due time. But these complacent analysts overlook the grim reality that the vast majority of urban workers make around $6,000 to $10,000 annually, and a $200,000 flat is permanently out of reach.
They also overlook the extreme concentration of wealth that goes into every purchase of a small flat byt households that really can't afford the cost: the entire extended family's wealth is often poured into the flat, and money borrowed from friends and relatives or even loan sharks.
The other problem few Western analysts consider is the impaired nature of much of China's housing stock. Millions of units constructed in the early 2000s were hastily built and are now degraded. Newer buildings are not maintained, either, and there is a strong cultural preference for new homes, not existing units. (The government doesn't even keep track of resales/sales of existing homes; whatever minimal data is available comes from private brokerages).
In other words--who's going to buy the tens of millions of empty flats held as investments? What is the market value of flats nobody wants to buy or cannot afford to buy?
China has a demographic problem as well. The generation now entering the work force is much smaller than the generation that bought two or three flats for investment. There simply aren't enough wage earners entering the home-buying years to soak up this vast and growing inventory of empty homes.
China's stated intent is to move from a fixed-investment/export dependent economy to a consumer economy. But if we consider what happens when housing slows or even grinds to a halt, we realize the impact on incomes, wealth and consumption will be extraordinarily negative, not just for China but for every nation that sells China vehicles and other consumer goods.
(12 votes)
»
- Login or register to post comments
- Printer-friendly version
- Send to friend
- advertisements -
Entire globe is a housing bubble.
ENTIRE WORLD IS A BUBBLE
Yellen’s busted aneurysm, for sure, would bring down the global economy… ;-)
Looney
Everytime she thinks about the global economy she throws up in her mouth a little bit.
You call 4 gallons of puke A LITTLE BIT? ;-)
Looney
What's with this wealth effect? My house has gone up 5x in value. It's the same old crappy house only older. My income has not gone up. My taxes have gone up.I can buy less.
Oh my, look how neatly that building is falling down... it must have been hit by an airplane.
Hahahaha! You are very smart funny! Boris is see what you are do, you are make "truther" reference!
there are other oddities in China that I don't understand. My friends will drive me around and show me their new homes...they will point to entire buildings and say "no one wants to buy those because you cant get the papers (or certificate)" or something like that. I don't understand the distinction but the buyers avoid entire construction projects.
Also....most chinese do NOT like "used" homes. That's what they call them. They only want brand new. I said, so...who will buy your house if you ever want to sell it? It's like they never even thought of that....and ironically, they don't seem to care.
My... even the Universe is a bubble and still inflating.
NAH.....didn't ya know that the cool new theory now about the Universe is that it is a Hologram.
Oh...wait.....it kinda fits either way.
BTW....I would have upvoted just for the War Pig pix.
https://www.youtube.com/watch?v=9ssDXiMLX9o
Remeber this folks. The second mouse gets the cheese. Get your money on the sidelines and wait until the traps start going off.
Nobody talks about the humanity bubble either...
Famine, disease, and war will pop that one.
Not in China. They may have eased one child rule, but they need to eliminate it entirely.
May take a while, you gotta breed new consumers.
this year they will have a mini baby boom.
2 kids rule + year of the monkey.
People fucking love monkey babies.
China's birthrates are right in line with most of it's neighbors and many of the advanced and developing nations of the world...so, what started by decree seems to have turned into economic neccessity. Best guess is this change in policy will have little to no impact on birthrates.
A better plan may be to entice their Chinese to move back to China from Vancouver, Cali, Australia, and so on. These essentially ex-pats have good reasons for leaving. Cure corruption, solve the pollution and open up the internet more and loosen regs on currency flows and freedom of speech and dissent. Right now xi is called by some 'the second mao' which does not exactly induce people to want to stay there.
You don't spend much time in China, do you. Xi is regarded by most Chinese as the greatest leader since Mao. China has a lot of freedoms that Americans don't have. Their core values are much different than western society, so you think a rubber stamp of America would make China better.
They don't need all the Chinese expats who fled China to avoid jail for stealing money.
Every single human being currently on Earth could fit inside the state of Texas, at about the same population density as you find in NYC.
And every one of them consumes resources to stay alive.
US has 71.7% financial "assets" per household China has 74.7% "real estate" assets per household
Zionists will try to collapse the rest of the world ecnomies and save Mukar because the Jewish Empire is the American Empire.
i dunno... obama really pissed off bibi
o will be history soon, replacement will turn it around-ha...
Having been in China many times over the last decade, I completely agree. In addition, most of these apartments are sold as bare shells for 200k to 500k. So the price does not include cabinets, flooring or plumbing fixtures. IF somehow millions of people could move to these new houses, who would buy their old houses with a population that is flatening and soon declining? There are literally dozens of these complexes of 50 twenty story towers being simultaneoulysbuilt around Shanghai at the moment....the deluge of apartments has not yet peaked.
I relish the concept of uprooting people from land to build an empty skyscraper. Such a beautiful image of human nature.
So how do I short the Fuck out of this situation?
The are reforming their househould registration system.
Previously if you are registered as a "peasant" you don't get social services like hospital, school etc in cities.
Now peasants will enjoy equal social services as their city counterparts, while also keeping their land benifits/titles back in their home villages.
They are hoping peasants will now want move to 3rd tier cities, where the housing glut is most severe.
good luck with that shit.
Let me ditto your comments. I have family in China. The preference for new units is a bit conditional. "Old" units may be Communist era gray concrete with two outlets. Anything new is better and people got generous compensation for their old units. These are usuallly demolished.
Even in the second tier cities, I have seen huge buildings often 20+ stories that are empty. The Chinese have a strong predilection to build straight up even when lots of land is available all around. Since, development is still state run there is no real supply-demand calculation. In fact, provincial governors had to hit GDP targets and the easiest way was to keep building stuff. They have a preference for buidling new stuff over repairing old stuff, as well.
Their valuations may not connect much to reality at all. This would make for a huge and sustained economic crash.
everyone in china saw this shit coming back in 2012 what's the fucking big surprise.
the big surprise is that this shit has been happening since 2012 and almost no one is worried.
the central government was worried but was too weak/corrupt to stop the RE binge.
local officials weren't worried, they were too busy extorting bribe out of developers and moving their family & assets to the US.
If you notice, but can't act, you're fucked. If you can act, but don't notice, you're fucked. But every last punter in a position to both notice AND take action, took action. That action was cover their ass and stack some away first. And that made it worse. And it's been going on for years, right up the chain.
If true, Australia will be first down the toilet. they own a large proportion of our prime R/Estate.
But they'll circle the drain in the opposite direction.
Yes in Auckland, New Zealand too. That is the Chinese hedge fund. That isnt going to work out too well though as Australasia is tied to China via commodities.
"The generation now entering the work force is much smaller than the generation that bought two or three flats for investment."
FWIW there are around 8 million university graduates in China each year. That's bigger than most Scandinavian countries' total populations.
So a few million neighborhood mafia loan sharks won't get paid back. What can possibly go wrong?
You're gonna need a smaller house.
I worked in China for a few years and found the RE market to be very interesting. Everything pointed to "the sky is the limit" but something wasn't adding up. When I explained the housing bubble to my Chinese friends they just couldn't believe it could happen there. http://twoicefloes.com/your-turn/casey-stengel-articles/where-is-george-...
Good link. It is very similar to what I have observed. Also, they go to the bank and get a suitcase of cash for the downpayment, not a check. It shocked me.
What I wonder, given everything is government run is how long the govenment can keep the mismatch going. While they seem like good capitalists at the micro or local level, it is the macro level which will bring disaster. As far as I can tell they are clueless. In the West, where governments do run pretty much everything, even the Leftists have had a class in Adam Smith and supply-demand curves.
That suitcase of cash is also necessary for international adoptions. Our friends had to bring US$25K in brand-new uncirculated $100 bills and give it personally to the director of the orphanage over there. Apparently, that's the current value of an infant daughter of undetermined origin.
these homes sit and the owners loose value or loose the ownership outright.
a house is a depreciating asset. it is the land that goes up. and in china the land remains with the state.
this is not good no matter how it is analyzed...
Quit playing tonsil hockey. First of all the capitalized return on Non- industrial real estate is just below the [caugh* caugh*] fed stated rate of 2.00% since WWII. I
Insurance, property taxes, upkeep, asshole neighbors, loss of liquidityunless you know Jamie Dimon
The only reason real estate is elevated, is because of offshore investment, capital misappropriation, and over extended credit.
Commercial real estate is starting to crack again. It was saved by more stringent lending requirements in 2008. This time, it's levered to the hilt.
Fucking Chinese dipshits, can't even run their own ghost cities!
Absolutely correct, never touch Leasehold. It is so bad in Auckland that people walk away from the property as no one in their right mind will touch it with annual leases of 60,000.
Hope in America homes lose about 50 percent of value soon
How about we just send all the muslim refugees to China? China is an up and coming nation, shouldn't they be pulling their weight when it comes to international charity?
They are communist, religion is barely tolerated.
But the muslim noodle restaurants are the best places to eat. Amazing!