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.
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Because relocating muslims to a country where the main source of protein is pork is a well thought out idea.
Bring down the global econmy?? Perhaps, but here in the good, old USofA, our stock markets are safe as we have a Bullard who can fix anything bad in equities.
Really.
It's very instructive to remember that at one time this country was a much smaller version of China namely in the 1920's right up until ...... yeah that.
It's the same thing.
At the time Great Britain was the worlds greatest power and we were stealing all their jobs and making stuff cheaper.... "sound familiar?"
Yeah the British pound was the world's reserve currency and when they accumulated too much debt their demand went south it left us with a whole lot of excess capacity..."sound familiar?"
What came next of course was a depression followed by a world war.
Same as it ever was.
They are going to magnify what happend to us a 4 or 5 fold. At the end of this I just can't see their government surviving this.
Well just have to see.
Oh yeah the real estate bust and stuff was over a year old by the time it finally crushed our stock market so the clock is ticking on the market in China.
There is so much fraud and double book keeping and just outright stupid there because a lot of things are just not kosher you can't fail there without risking death.
You think maybe they might be all lying about how bad it is?
Um, yeah I think they are and I bet when the light finally gets flipped on you WILL NOT BELIEVE how many roaches there are.
Nukes didn't exist back then, so yeah...
conrad, you hit the nail on the head. I walked around saying that this whole thing is a replay of our story from the twenties thru the seventies. The social stigma of the country people coming to the city is exactly what we in the US experienced as folks in the south escaped the poverty of the depression by going to Detroit or any of the northern cities to find work. https://www.youtube.com/watch?v=Y4dIZcBFAwo This is all a big script that gets played over and over.
China's housing bubble IS bringing down the world economy.
There, fixed it for yah.
Squid
Unless BlackRock (or the like) comes in and swoops them up, China's local Governments may end up buying these investment grade apartments for a song. Enter the new era of the 'Council House' or the Chinese Slum Lord.
LOL.
Shits and giggles:
Zillow any community within a 50 mile radius of a blue hive.
Hover over listings for sale and note auction/pre-foreclosure/foreclosure.
Nope. No bubble.
China is in the early years of a 20 year plan to move 300 million rural residents to the cities. These people are not contributing much at all to producing food, since they only grow enough for their household. It would be much better to have a farmer with a tractor run a large farm than the current system of having hundreds of peasants hacking away with hand tools. These people will provide the means to redistribute the spec housing. Where will they get the money for the 20% it takes to finish their unit? From the money the government gives them when they take their property. It's just Eminent Domain under another name. 200 million migrant workers are living in temporary housing while building the infrastructure now. They would call for their families back in the village in a New York second if they could. They have the money. The average migrant worker makes as much as a recent college graduate. It's hard, dangerous work out in the elements, but they are used to that, being farmers. They would welcome having a job in manufacturing or service industry.
China dragged a billion people from starving medieval serfdom to the world's largest economy in 60 years. They can handle this minor hurdle.
I understand why John Williams, David Stockman, and PC Roberts are deemed experts and their opinions highly regarded, owing to experience and credentials.
Could someone please explain to me what Charles Hugh Smith has done to make his views so highly esteemed in financial circles?
Because he thinks...unlike all of these Ivy-League PhDs. Or in the current vernacular, he thinks outside of the box and is willing to share his thoughts.
The only difference is that the average U.S. citizen or foreign citizen in't holding Chinese mortgage backed securities. But since economic output is directly linked to consumption, and if the Chinese consumer is as crushed as the American ones are, then yes, it will further drag this shit-show into the gutter where the Fed propelled it to.
The crimes against humanity by this Fed must be accounted for by the U.S. legal system. Their actions must be audited to understand the true extent of what they are doing, and what they have done behind the publics' backs and without authorization. Then the appropriate people there need to be prosecuted. They should face Chinese-style punishment.
When someone commits a financial crime in China, they are put to death, and beforehand they are forced to wear a sign which tells the public what crimes they have committed.
http://www.businessinsider.com/chinese-white-collar-criminals-death-sentence-2013-7
U.S. to run a $600 BILLION deficit with China this year. That number will only grow when China's housing bubble bursts.
Most of empty buildings in first tie cities already sold and held by buyers as financial parking lots while buyers themself live some places else. In 3rd and 4th tie cities, yes there are housing bubbles but chinese average living space is still below world's average and once their .gov allows high-end farmers moving in 3rd/4th tie cities, bubbles will be gone very quick.