China’s housing bubble was the biggest the world has ever seen. At its peak, housing represented 29% of GDP. And it was mostly financed by borrowed money because China’s disposable incomes are very low. Even in richer urban areas, these averaged just $7,322/capita (Rmb 52k) in 2023.
So it is no surprise that the boom is now being followed by a bust:
- Beijing prices fell 10-30% from their peak by December 2023
- Residential home sales were down 31%, and property developer cash reserves by 26%, by March
- China’s Top 100 developers saw new property sales fall 47% YoY in January – April this year
EMPTY APARTMENTS ARE A MAJOR FEATURE OF THE MARKET
One problem is that nobody really knows the scale of the surplus. As the video from our post here in September 2021 shows, some local governments have been demolishing empty apartments.
China home inventories (months of excess supply**)
But latest CEIC data shows current inventory of unsold apartments has reached a new record at 25 months, as the chart shows..
And the most recent estimate from He Keng, former deputy head of the official Statistics Bureau, suggests that today’s surplus could perhaps house 3 billion people:
“How many vacant homes are there now? Each expert gives a very different number, with the most extreme believing the current number of vacant homes are enough for 3 billion people. That estimate might be a bit much, but 1.4 billion people probably can’t fill them”.
CHINA’S DEBT-FUELLED ECONOMY IS NOW SLOWING
CHANGE IN CHINA LENDING VERSUS GAIN IN GDP $ TRILLION 2002 – 2003
The issue is that China’s development model has been built on debt. The central bank only began to record lending data in 2011 and its history only goes back to 2002. As the chart shows, lending data breaks down into 2 periods – before and after 2008’s Great Financial Crisis:
- Until 2008, each $ of debt created 0.60c of GDP growth. China was building essential. infrastructure to pay back over decades. In 2001, for example, there were only 18 million cars on the road – and production was just 3 million.
- After 2008, however, China adopted the US stimulus model and became ‘subprime on steroids’ as we have noted before. As in the US, housing and auto markets soared. But each $ of debt created only $0.37c of GDP growth
TOTAL LENDING FELL LAST MONTH FOR THE FIRST TIME SINCE 2005
CHINA OFFICIAL, SHADOW & LOCAL GOVT FINANCING ROLLING 12 MONTH AVERAGE, 2008 – 2024, Rmb
The oversupply didn’t matter too much in the past. People were quite happy to buy a half-finished apartment and pay the mortgage on it, as long as prices were rising.
But the problem with a debt bubble is that, like a balloon, it needs more and more debt to keep expanding.
Thus China’s Total Social Financing (TSF) grew 5-fold between 2008-2020. But then, inevitably, it began to implode. Last month, TSF lending actually fell for the first time since October 2005, as the chart shows:
- So the air is coming out of the housing bubble as the lending boom turns to bust
- Housing starts are now down 25%, and developers continue to go bankrupt
CHINA’S ‘ONE CHILD POLICY’ REDUCED THE NUMBER OF BABIES BEING BORN
CHINA MALE : FEMALE RATIO AT BIRTH 1950 – 2021, AGE IN 2024
China has an ageing and declining population, and so housing demand is inevitably going to reduce.
Marriage is a key driver for housing demand, and has been in decline since 2013. A further problem is the impact of the One Child Policy between 1980 – 2015, as the chart shows:
- Couples were only allowed 1 child under the policy, and many couples preferred to have a boy
- As Our World in Data confirms, China’s male: female ratio is well above normal levels. As the UN report:
“China has the longest period of armally high Sex Ratio at Birth (SRB) in the world. China’s SRB soared in the 1980s and ranked the highest in the world in the first ten years of the 21st century.”.
Conservative calculations based on this data suggest China “lost” a minimum of 87 million girl babies between 1980 – 2021. And, of course, girls who haven’t been born can’t have babies.
Inevitably, the problems are now spreading from the property market.
Local governments used to rely on land sales for much of their income during the boom. Today, Ministry of Finance data shows this revenue has fallen 33% from Rmb 8.7 trillion ($1.2 trillion) in 2021 to Rmb 5.8 trillion ($800 billion) last year.
It expects a further 10% fall this year. And so services are having to be cut. In turn, the continuing bust in the housing market will have an increasing impact on the wider economy.