China's Housing Is Recovering, Just Ignore The 10 Billion Square Feet Of Vacant Housing

Tyler Durden's picture

While we await China's fabricated and goalseeked Q4 GDP number (less than 3 weeks after the year end) which barring some even more humorous miracle will show China's slowest growth in a quarter century, here is a quick recap of what the world's second largest economy said about the most important part of its economy overnight.

Why most important? Because as shown previously when remarking on the futility of China's attempts to create a massive wealth effect by blowing an epic stock market bubble, in China the vast bulk of household wealth is allocated to real estate, unlike in the US, where three quarters of household net worth is in financial assets.

 

According to China's entertaining National Statistics Bureau, in December new home prices rose in 39 out of 70 cities, up from 33 cities in November, representing a 7.7% increase year-over-year in new home prices.

On the surface this is great news for China, whose housing bubble had burst in early 2014 and which has been desperately doing everything in its power to reflate it once more. So was this the long-awaited light at the end of the tunnel? Not so fast. 

As Reuters notes, the headline number masks China's massive property problem - a vast amount of unsold apartments mainly in its smaller cities. "Property prices were rising fast in mega cities like southern Shenzhen, where prices rocketed by nearly 47%, Shanghai, up a healthy 15.5%, and Beijing, which posted a respectable 8% gain over a year ago."

But the recovery that began in October, after 13 months of straight decline, has only spread to just over half the 70 cities captured by official data, leaving others languishing far behind.

The chart below shows the unprecedented divergence that has developed between prime Chinese cities and the rest of the nation.

 

The last time Tier 1 home prices soared as much as they have relative to the rest of the nation in late 2013, China suffered its worst housing crash in recent history, leading to the bursting of the shadow banking bubble in late 2014 and the current hard landing predicament faced by most Chinese commodity producers.

Why the surge in Tier 1? Simple: another round of massive government stimulus.

Shanghai-based property consultancy Centaline noted new home sales hit a seven-year high in December thanks to a swathe of government measures to spur demand, and a series of interest rate cuts. Realtors are hopeful that buyers unable to afford the cities in the first two tiers will eventually go elsewhere.

Unless, of course, like in the US, buyers only buy in specific locations because they hope to find a greater fool and flip it as a quick investment. Because last time we checked nobody is buying in North Dakota because New York was too expensive.

This logic appears to have gained a foothold in China as well: Wang Jianlin, China's richest man and chairman of property and entertainment conglomerate Dalian Wanda Group, said on Monday that it could take four to five years for the market to digest the inventory in tier three and four cities.

"Sales are highly concentrated in first- and second-tier cities, where 36 top cities account for three-quarters of the total sales value. So the portion from third- and fourth-tier cities is very low. As long as they destock slowly, there is no problem," he told the Asia Financial Forum in Hong Kong.

Indeed, as the chart above quite clearly shows.

So while prices in China's Tier 1 cities are soaring, let's put the country's vacant housing problem in context: China has some 13 million homes vacant - enough to house the families of several small countries .

Actually, it's worse: Zhu Min, deputy managing director at the International Monetary Fund, recently admitted that China’s real estate bubble now manifests itself in 10. 7 billion square feet  (1 billion square meters) of unused housing! Min added that many housing stock go unused, and the market may see a significant price correction in the future, wiping out vast household wealth.

According to the Epoch Times, "despite limited demand, many third- and fourth-tier cities are laden with huge housing inventories, forming a bubble which may burst, especially in view of the low transaction volume for new houses in these cities” said Zhang Dawei, superintendent of the market research department at Centaline Property, according to Mingtiandi, a website that reports on China’s property sector.

According to Zhang Liqun, a researcher with a Chinese regime think tank, the bulk of China’s housing projects have shifted to smaller, so-called third- and fourth-tier cities. But market demand has not kept up, a fact that Zhang said could well lead to those cities becoming ghost towns.

Because that is precisely what China needs: even more ghost towns.

So with China's GDP print, as fabricated as it may be, looming what does this mean for China's economic growth?

Even more bad news.

"Property investment is expected to see a single-digit decline this year despite recovering home prices, so it will continue to weigh on GDP," said Liao Qun, China chief economist at Citic Bank International in Hong Kong.

For the first 11 months of 2015, property investment accounted for 13 percent of gross domestic product. But the sector's multiplier effect on other industries, from building materials to white goods and furniture, means its impact on the economy is far greater.

"Looking forward, the property market would continue to drag on the broad economy in 2016, with property investment probably showing weak growth momentum," said Wang Jun, senior economist at the China Centre for International Economic Exchanges (CCIEE), a Beijing-based think-tank.

And here is a spoiler alert: Premier Li Keqiang said this past Saturday that China's economy grew by around 7% in 2015, which generated much laughter among the China-watchers, because if the currently global pre-recession environment is the result of China growing at 7%, one wonders just how acute the global depression will be when Chna grows at 5%, or 3%, or 1%, or stops growing altogether. 

What does the Wall Street consensus expect? Just a fraction lower, or 6.9%.

But analysts polled by Reuters have forecast fourth-quarter GDP data set to be released on Tuesday will show growth slipped to 6.9 percent last year, the slowest in a quarter century and down from 7.3 percent in 2014. China's growth is expected to drop to 6.5% by the end of the year.

The reality is that nobody has any clue what China's real growth was in 2015, with estimate ranging as low as 1%. One thing is certain: whatever China's National Bureau of Statistics reports GDP was in 2015, the real number will be far, far lower, and it will only drop from there once the commodity defaults begin in earnest.

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khnum's picture

....and yet they are spending money in the billions buying urban and rural land in my country

fx's picture

13 million  vacant homes is a big number for sure. 1.2 bn people is an even bigger one.

skinwalker's picture

Why are the Chinese so obsessed with rel estate? I lived in Ningbo for a few months back in 08 and it was all my chinese friends could talk about, how to obtain real estate. 

CHoward's picture

It's the Chinese Dream - we have our own American Dream and that is owning a home.  In China they just go slightly overboard and own a house, or two or three or ...

Haole's picture

They are not "obsessed" with real estate.  They are obsessed with protecting, and perhaps creating a revenue stream from, their capital.

Living in friendlier jurisdictions in some regards never hurt either...

Handful of Dust's picture

The above comments are all true plus ... After decades of commune rule where no individual is allowed to own anything since all your assets belong to the commune, they have a pent up demand for ownership and RE is at the top of their list followed probably by gold.

 

However, i see people from all of these dictatorship nations buying land in Canada, Australia and the usa like crazy fighting to get every penny out of their coutnries for fear of it being taken away by the dictator. Of ocurse, there's the embezzlers and gubmint Looters who are a special group of their own sneaking as much of their Loot out also since up until now these countries did not check on the source of funds---in the millions---to buy large tracts of land or those $8-$15 million dollar houses in Vancoiuver, Seattle, and Sudney.

 

However, these countries are compliling lists of all foreign owned RE and slwoly going down the list looking for Looters and asking source of funds or foreigners wanted by their home country so it will get interesting. I woul dot be surprised if you see wholesale confiscation of foreign-owned RE under the excuse of 'enforcing the law.' It's already happeing in Australia with the Revenue office if forcing the sale of their Australian property of Mainland Chinese who "broke the RE rules."

silverer's picture

That's one way to keep rents low.  Billions of sq. ft. of empty space.  Hard to imagine.

khnum's picture

....and in the western world you have a 3 year shit fight with local councils,progress societies and greens just to build a block of a dozen flats

Soul Glow's picture

China's 10 Billion square feet of vacant housing is fine.

mjk0259's picture

Thats about six square feet per person. Big deal.
We have more vacant space per person than that just n empty stores or office buildinfs or abandoned areas

OhNo's picture

Yeah and most are not fitted out with anything, which is a major cost.

Iam_Silverman's picture

Just sayin'

All of that unoccupied real estate would be perfect for Syrian refugees!  Just think how robust their economy and lifestyles could be with just a little inclusiveness!

Zekeman's picture

They would need to stay in line or they will get disappeared. I see a problem solved solution here.

Cruel Aid's picture

the chinese get a pass on every friggin thing. no muslims, no pollution control, free reign to steal intellectual property including military secrets. Somebody up there likes them!

chairman mao's picture

A red blood real estate tycoon just recommended demolishing all "surplus" properties in China a few days ago.

I think they will do it.

Haole's picture

Rather than "front-load" a massive debt-fueled "market" rally for the 1% of the 1%, the Chinese have front-loaded knowlegdge, technology, infrastructure, manufacturing, real "money" and a second child.

You do the fucking math... BTChez.

Spiritof42's picture
Spiritof42 (not verified) Jan 18, 2016 9:19 PM

Here's one for the books. The Chinese spent $200 million on a shopping center shaped like the Pentagon and much larger. It's empty.

http://gizmodo.com/chinas-enormous-derelict-shopping-mall-does-not-bode-...

Freddie's picture

It is a shame that the USSA just has a shopping center shaped like The Pentagram instead of a real Pentagram.  They are not protecting my freedum or Constitutional rights.

They are fighting for the elites and banksters.

Haole's picture

The Pentagram in the U. ISIS. A is a shopping mall for souls Freddie, the one in China is the future of prosperity on this rock I submit.

Love you man, glad you're still around...

indaknow's picture

Are they blowing up vaccant homes yet?

arbwhore's picture

So at 200 sq ft per person that amounts to room for 50m people so a 3.6% vacancy rate. Not tight but not exactly empty either.

alexcojones's picture

A Billion here and a billion there and pretty soon you're talking about real mansions.

Freddie's picture

Shitty CNN and their endless propaganda:

Chinese ghost mall back from the dead:
http://www.cnn.com/2015/04/28/asia/china-ghost-mall-return-to-life/

The stpry is from April 2015.

Cruel Aid's picture

That was then, wonder how that place is faring in jan '16

Yen Cross's picture

   If you're going to have protests, and start starving farmers, house them properly.

   Ghost Cities<> Capital Outflows... What could go wrong?

 The French demonstrated that one, last week... Don't forget the " Rehabilitation Furry Friends" { RFF}

Haole's picture

The U.S. tripped over itself quite handily a few times on it's way to being the America that was great, the America that many of us will remember to our dying day in sympathy.

FreedomGuy's picture

When you pair this with ghost cities and probably a lot of other worthless government spending to make pseudo-fake GDP numbers it represents the death and destruction of capital in a country with very low per capita income. It is not a small thing. To build an empty useless city or hundreds of thousand of vacant apartments represents capital that could have been used to buy productive assets, build real wealth or even hedge the future.

It also represents an enormous misallocation of human capital as too many people in construction and supporting trades have been trained. Once the building stalls their incomes will drop precipitously as too many workers bid for too few jobs in their trades. It is hard to calculate the costs but easy to calculate the benefits up front when building this stuff.

surf@jm's picture

Maybe they can pass a squatters rights law, and let the peasants move on in.....

Along with a chicken in every wok, and fourty acres and a water buffalo, they should be set.....

roddy6667's picture

13 million vacant homes in a nation of 1.5 billion people is not a problem. Families buy a home for their son when gets married, usually around age 30. This is often done a decade or so in advance. The new homes are concrete and are sold as shells, so there is almost no carrying cost. there is no property tax in China. An American expat friend of mine was looking at a finished unit to rent. They told him it was for their son when he got married. He expressed concern about being kicked out early, but they told him not to worry. The boy was eight years old.

With low interest rates, speculation in real estate almost always pays off better. A tangible investment has more appeal than a paper one.

China is in the early years of a 20 year plan to urbanize 300 million rural citizens. Where do the China critics think these people are going to live? There is no problem with real estate in China, except when an observer looks it as if he were in America. Typical American parochialism.

OpenThePodBayDoorHAL's picture

So China's going to grow grow grow...by selling cheap shit to...who again? Broke-ass Americans? The broke-ass Italians? French? Venezuelans? Oh, I know, they're going to grow grow grow by putting $28 trillion on the balance sheet of their central bank. And maybe throw in a few trill by rehypothecating those piles of copper four times over...and then bail out the SOE that made the loans..through more money creation at the PBOC. Hey wait maybe we can do what the gaijin are doing and puff up all these stock thingys...I know, we'll just jail anyone who tries to sell. Decoupling, right? Banzai! (oops wrong country)

NoPension's picture

Buildings, or anything complicated for that matter, can't sit vacant or unused for lengths of time. They deteriorate.
If they are unfinished inside, WTF?!
Are there corresponding water, wastewater and power utilities? If not, WTF?!
You cannot do this.
Put a brand new car in a garage. Take it out in 10 or 15 years. You would not want to drive it.
Motors rust. Lube settles. Cables corrode. Without constant Hvac, contacts and critical components corrode and rust. Mold. Mildew. Dry rot. Vermin. Rubber seals dry out. No machines can sit idle, and not be maintained, at significant expense, and be expected to function and last.

They will be knocking this crap over in twenty years.

PeaBird's picture

It's not just vacant square feet within China, but also vacant square feet outside of China that are predominantly owned by Asian (read Chinease investors). This article came from news.com.au back in November 2015: http://www.news.com.au/finance/real-estate/shocking-number-of-melbourne-...

dogismycopilot's picture

ok, so the US has spent a few trillion in the Middle East...what do we have to show for it?

at least the Chinese have the physical assets!

Iam_Silverman's picture

"ok, so the US has spent a few trillion in the Middle East...what do we have to show for it?"

Gasoline near a dollar.  Oh, and the world's reserve currency?

svc101's picture

Great place to harbor 1 Bn economic refugees from the Middle East, once oil goes to 20.