China Issues A Stark Warning About Its Housing Sector

Something is afoot with China's housing sector.

On Christmas Day 2018 we reported that the chairman of a leading Chinese state bank warned Chinese investors not to buy property now because “there’s no money to be made” due to high prices and alarming vacancy rates (an ominous development we first discussed last month in "The "Nightmare Scenario" For Beijing: 50 Million Chinese Apartments Are Empty").

Offering some surprisingly blunt advice which would appear counterproductive to his business model - after all Guoli is incentivized to make as many mortgages as possible - Tian said that "there’s no money to be made if you buy a flat nowadays. If you insist on buying a home, aren’t you trapped at the high price level?" The CCB Chairman was speaking at a forum organixed by Peking University’s Guanghua school of management.

As the SCMP reported, the warning by Tian, who is an alternate member of the Communist Party Central Committee, came at a time when the country is in heated debate about the role of the property market – whether it will lead to an bust or whether it can help shore up the economy.

Now, in the latest warning about China's housing sector, the Communist Party’s People’s Daily warned on Wednesday that China’s regional economies need to reduce their reliance on the property market for growth and instead focus on sustainable longer-term development.

The story is familiar: in recent year, hundreds of cities across China have seen upswings in their local property markets under a long-term plan by Beijing to further urbanize the country. The process of building new homes and revamping old ones has only accelerated in the last few years, backed by local governments keen to boost land sales and meet red-hot property demand. Indeed, the total sales of China’s top 100 real estate developers soared 35% last year, according to private research firm CIRC.

But repeating a now familiar warning that the party is over, Beijing has once again expressed concern that some cities, looking for rapid expansion, have grown their property markets too quickly and at the expense of new industry development, adding potential froth to real estate prices.

“All areas should focus on their own urbanization processes, develop their own pillar industries according to population mobility and resources, and form new points of growth to avoid the old road of relying on real estate to drive the economy,” the commentary quoted a professor at the Capital University of Economics and Business as saying. The warning is almost verbatim a copy of what China Construction Bank chairman Tian Guoli said one week ago when he warned that "there’s no money to be made if you buy a flat nowadays."

The commentary, which surprisingly appeared in the international edition of the People’s Daily, said a stable and healthy property market is crucial to the development of China’s changing economy, and cited an analyst who said that a thriving property market driven by reasonable prices boosts demand for both raw materials and downstream items such as appliances and home decoration. The flip side, obviously, is a runaway housing bubble and as events in 2006/2007 in the US demonstrated, has a very unpleasant ending.

Meanwhile, as we reported last month, while average new home prices in China’s 70 major cities rose for a 43rd straight month in November, the rate of increase slowed amid weaker growth in the country’s smaller cities, and soft home sales and land purchases suggest a dim outlook for the sector.

The article also comes as a number of Chinese city authorities seek to ease existing curbs on their property markets, despite broader directives from Beijing to keep prices in check.

And yet, in a bizarre flip-flop, last week the city of Hengyang rescinded an order to lift restrictions on property prices, having just introduced the easing measure a day earlier; this example shows the catch 22 that China finds itself in - with much of Chinese economic growth reliant on continued expansion of the housing sector, any attempts to curb said expansion would lead to a more immediate, if less painful economic hit. By delaying the day of reckoning China is only assuring that when the bubble bursts, it will take down not only China's, but the global economy down with it.

Following the People's Daily report, the Hong Kong-listed shares of top Chinese real-estate developers China Vanke, Sunac China, China Evergrande, China Overseas Land & Investment and Country Garden all fell, some by as much as 6-7%, while an index tracking major property firms eased 0.7%.

CRIC predicted that the property sector will enter a period of stable growth this year, with the top 100 companies’ annual sales growth rate slowing to 20-30%.

Meanwhile, amid reports of massive housing vacancies as Chinese builders overextended in recent years to prop up GDP resulting in over 50 million empty apartments, there has also been increasing concern that a downturn in the housing market would hit households, banks and developers hard – and this in turn would be a serious threat to China’s state banks and local governments, whose revenues are tied to the property market. Meanwhile, even the smallest turbulence in the market could unleash a furious firesale as builders seek to dump vacant properties: in China, some 22% of the total housing stock is unoccupied, roughly double that of other developed economies.

The net result is that the debt keeping China's housing bubble afloat has keeps rising, with the value of outstanding real estate loans – including mortgage and development lending – reaching 38 trillion yuan (US$5.5 trillion) by the end of September 2018, or 28% of total lending, according to government data, while just personal home mortgages in China have exploded sevenfold from 3 trillion yuan ($430 billion) in 2008 to 22.9 trillion yuan in 2017, according to PBOC data.

By the end of September, the value of outstanding home mortgages had surged another 18% Y/Y to a record 24.9 trillion yuan, resulting in a trend that as Caixin notes, has turned many people into what are called “mortgage slaves."

What is most troubling, however, and what may have spurred the official government warning, is that despite relatively stable home prices, the foundations behind the housing market are cracking. As the WSJ recently reported, one year ago, a group of homeowners stormed the sales office of their Shanghai complex, "Central Washington", whose developer, Shanghai Zhaoping Real Estate Development, was advertising new apartments at a fraction of the prices of the ones sold earlier in the year. One apartment owner said the new prices suggested the value of the apartment she bought from the developer in March had dropped by about 17.5%.

“There are people who bought multiple homes who are now trying to sell one to pay off the mortgage on another,” said Ran Yunjie, a property agent. One of his clients bought an apartment last year for about $230,000. To find a buyer now, the client would have to drop the price by 60%, according to Ran.

Of course, if that is the true clearing price to bring China's massive housing market into balance, a global economic crisis and global deflationary shockwave - launched by China's housing sector - is now inevitable, it is just a question of when Beijing will finally pull the pin.