“Falling home values. Debt-strapped borrowers. Real estate woes dogging the economy.” Sounds like the US circa 2007, but it is also going on in China right now.
The LA Times recently wrote an article about China’s property market, highlighting many of the issues it faces. While it seems certain prices will fall, will it be orderly? Or will it be more chaotic like the US? Here are some points on both:
Orderly:
- China’s government has intentionally slowed development
- Lending and purchasing restrictions could be lifted if need be
- Leverage is not nearly as bad as it was in the US ( first-time buyers have a 30% down payment required)
- Hundreds of millions of Chinese are moving into cities
- The drop is not surprising as I can recall this forecast by China bulls and bears alike for some time
- Equity prices in China are down pretty far over the last 12 months (greater than 20% on the Shanghai Composite Index) indicating some of the pain may be priced in
Chaotic:
- Home prices have fallen for 3 straight months
- Average home prices are down about 40% from their 2009 peak
- Beijing has nearly 2 years worth of inventory
- Sales are plummeting
- Property sector is one-fifth of GDP and a huge employer
- Local governments are highly dependent on sales/appreciation
- Banks have issued a record number of home mortgages
- Home buyers have staged numerous demonstrations (see the personal side in the linked article)
- China has built empty cities
The answer to this question will have broad ramifications for China and the rest of the world, which is hoping that China becomes more of a consumer and/or feeds its demand for commodities.
I myself can’t say I know how it will ultimately shake out. On the one hand there are things that certainly don’t pass the smell test (see the Ordos video), on the other hand there seem to be some tangible differences between our housing market and theirs.
