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

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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