China’s property market is the epicentre of the global debt bubble discussed yesterday. It has been red-hot since urban residents became free to buy their own home in 1998. Before then, they lived where the state told them. With interest rates held low to boost state-funded infrastructure spending, people had few options for investing their money.
The result is that prices have become totally unaffordable for new buyers. Beijing house prices average 34 times average earnings, and Shanghai sells at 29 times average earnings. Even worse is that property has provided massive opportunity for corrupt officials to feather their nest. 30% of all property is owned by just 1% of the population, and around 2.1 million households own between 40% – 50% of China’s $10.5tn real estate and financial assets.
Now these same officials are selling in a frenzy, panicked by the thought that their property holdings will soon have to be published on the internet, for anyone to see. As China Daily reports:
“Once sky-high priced houses in Hua Qing Jia Yuan, a famous residential district near a key primary school, are witnessing a decline in prices to less than 60,000 yuan per square meter. A homebuyer said properties in that district were being sold at 100,000 yuan per square meter just six months ago, but recently she was shown a 106–square-meter house priced at 6.2 million yuan.”
The downturn is also now beginning to widen, as the government’s efforts to control shadow bank lending have led house prices across China to start falling. Thus the research unit of real estate developer Soufun reported:
“Rising market supply and sharp falls in transactions have put relatively heavy pressure on property developers’ sales, leading some to beef up promotions and adjust their pricing strategy.”
And there will likely be more falls to come, as the government wins its battles with local authorities who have been keen to support prices in order to boost their income from land sales – often their major revenue source.
The size of the earthquake now underway is highlighted in private remarks by Mao Daqing, vice chairman of China’s largest developer, China Vanke. Leaked online, they apparently suggested that China’s land bubble now parallels that of Japan before its crash in 1990:
“Tokyo’s total land value in 1990, prior to the property bust there, was equal to 63% of U.S. GDP in 1990, he said. During the Hong Kong bubble in 1997, land values there reached 66% of U.S. GDP. In 2012, the total land value in Beijing was 62% of U.S. GDP, “which is a scary number”, Mr Mao said”.
An unofficial report of the speech by JL Warren Capital highlights the core problems:
“Mao singles out three major trends in the Chinese real estate sector in 2014:
- Tier 2 and Tier 3 cities: Supply exceeds demand, by a lot
- Tier 1 cities: Continue to see robust demand; however, land prices have gone up more than Actual Selling Price for projects
- Credit has tightened.
“China’s anti-corruption campaign has had a greater impact on high-end property projects than most have realized. Investigations are ongoing into owners of property priced around 40K-50K RMB/sqm, ($6.5 – $8k/sq metre) not to mention more expensive properties. The increased scrutiny surrounding the anti-corruption campaign has caused demand to fall off in the high-end property market.
“The second-hand housing market has been even more impacted by the anti-corruption campaign. New listings for sale surged to 10-12 units per day, twice as many as before.
“Many owners are trying to get rid of high-priced houses as soon as possible, even at the cost of deep discount, because many corrupted officers have illegally accumulated several or more houses through bribery or embezzlement. As a result, ordinary people who want to sell homes in the secondary market must face deep price cuts….
“Most cities have witnessed an increase in inventory-sale ratios for residential buildings. Among the 27 key cities we surveyed, more than 21 cities have Days Sale of Inventory (DSI) exceeding 12 months, among which 9 have DSI greater than 24 months….
“The second critical issue is the demographics in China. Our research shows that by 2033, the total population aged 60 and above will reach 400 million, as well as an additional 270 million people living on social welfare. That is, by the end of 2033, there will be approximately 670 million people, or 50% of the Chinese population, will be living on social welfare”.
The detail behind the remarks makes it clear this was not a ‘top of the head’ speech, but carefully considered. Mao, along with China’s leadership, seems to recognise that there comes a point where the can cannot be kicked down the road any more, as it is likely instead to end up over a cliff.
Total housing activity totalled nearly a quarter of China’s GDP last year, according to Moody’s. So as China’s Academy of Social Sciences has warned, “we’ve got to let the growth rate go down”.
The fault lines from this earthquake thus run very deep indeed.