Exclusively from Michael Pettis’ newsletter:
Real estate prices continue to rise – in fact the sheer extent of the increase in real estate prices has been, for me, the only real surprise. Here is the Financial Times on the subject:
Residential prices soared in China’s biggest cities in August, raising the possibility that the government will take fresh measures to cool the red-hot market. Prices for new homes in Beijing, Shanghai and Shenzhen – the country’s three largest cities – surged 18-19 per cent year-on-year, accelerating from previous months. Nationwide, new homes prices increased 8.3 per cent year-on-year, up from 7.5 per cent in July.
The sharp increase in prices in the biggest cities is the latest evidence of a full-fledged recovery in the Chinese property market after it was smothered by several tightening measures earlier this year. A series of land sales have set record prices since August, with real estate developers ramping up their competition for the best plots in the biggest cities.
I expected real estate prices to keep rising as long as credit is so freely available, but it is unclear to me why real estate prices have risen so dramatically in the past couple of months. Part of it may simply be that few Chinese see any real alternative to real estate as a way of saving. Deposit rates are still low and the stock market has been uncooperative.
Money is still flowing into the country. Although the PBoC clamped down on companies that were over-invoicing exports as a way of bringing money into mainland China illegally, there is still a pretty wide discrepancy between mainland export numbers to HK and HK import numbers from the mainland.
Whatever the reason, and in spite of a fairly public debate on whether or not there is a housing bubble, Chinese households continue investing in real estate to the extent that they are extraordinarily vulnerable to a decline in prices. I found the following passage in a recent Bloombergarticle interesting and worrying:
Real estate has attracted “the lion’s share” of household investment in China, according to Standard Chartered Plc. It has made up more than 60 percent of household assets since 2008, compared with about 20 percent for cash deposits, Dorris Chen and David Yin, Hong Kong-based analysts at the bank, wrote in a report on July 4. That compares with 48 percent in the U.K., 32 percent in Japan and 26 percent in the U.S., the report said.
We are often told that a fall in housing prices won’t affect the real economy in China much because, unlike in the US, the amount of real estate financed by mortgages is quite low. This may well be true, although much of the leverage behind residential real estate consists of borrowing from friends and family and so is not recorded, but with household wealth so heavily concentrated in real estate I cannot believe that there are not some heavily pro-cyclical mechanisms in the property market.
With 60% of household wealth consisting of real estate, I find it hard to believe that rising prices have not goosed consumption to levels higher than it otherwise would have been. If this is true, it is hard to imagine that falling prices might not have the opposite effect on household consumption, especially if prices drop anywhere near the same extent that they have dropped after other housing bubbles. It is premature, in other words, to write off the impact of falling housing prices on consumer behavior simply because Chinese housing purchases are not structured in the same way that American or European housing purchases are.
It is anyway perhaps noteworthy that in spite of the soaring prices, the most sophisticated of the mainland real estate companies are not acting nearly as exuberantly as they might. According to an article in theSouth China Morning Post:
China’s biggest property developers are sitting on US$25 billion in cash as they prepare for a possible credit crunch and another round of crackdowns on real estate speculation. Companies including Shimao Property Holdings and Greentown China Holdings raised more than US$16 billion in offshore bonds and loans over the first eight months of this year – about 36 per cent more than in all of last year. But they have turned more cautious about investing, leaving much of that money on their balance sheets.
China’s property sector is a pillar of growth in the world’s second biggest economy, accounting for 15 per cent of the gross domestic product in the first half of the year. China data released on Wednesday showed new home prices in August rose at the fastest pace in 2-1/2 years strengthening the case for government cooling measures.
Reuters has analysed data on 76 Chinese property developers that reported June-quarter results, and found that while their cash and short-term investments spiked, their capital spending plans were more conservative.
This is clearly good news if true. If real estate developers are hoarding cash during times of soaring prices, they are behaving in a countercyclical way and countercyclicality is almost always a good thing, especially in an economy like that of China in which pro-cyclical behavior and balance sheet structures have been so heavily rewarded in the past decades. Perhaps this cash hoard can be used to support falling prices when the bubble bursts. They certainly reduce risk in the banking sector.
