China Housing at the Nexus

Autor: Roger Hamlin | Categoria: Economie
01-06-2015

The Chinese housing industry is at the nexus of several force fields pulling and pushing people all over the world. The health of the Chinese housing industry strongly affects global prices of resources such as cement, steel, iron ingots, coal, natural gas and lumber. It also impacts global shipping rates since many of these raw materials are imported from places like Australia and Canada. And, the spillover of middle-class Chinese speculative fervor is being felt in the real estate markets in places like London, San Francisco and Vancouver.

So, what is the status of the Chinese housing industry? We have all heard of the Chinese ghost cities built on speculation but with few residents. Yet, in a housing market the size of China’s, even a ghost city might be a drop in the bucket in terms of housing supply. Driving around China, the ghost neighborhoods, new high-rise housing developments growing like fields of corn stalks in, or on the edge of big cities are more visible.

But what does the data show: Chinese data is sometimes murky. China does have a vacant housing inventory. According to some estimates, at average sales rates, soaking up the current official vacant housing supply might take 13 months. This includes both completed units and those not finished. Some estimate the inventory of completed units at only about 6 months. This data does not encompass vacant units owned by families for speculative purposes not on the market. According to some estimates only about 10% of vacant units are in the hands of developers. A much larger, somewhat unknown, inventory is the property of individual investors. This unusual inventory might not have short-term consequences since owners are not selling, but may be a long-term drag on the market.

The overhang has affected prices. In the fall of 2014 (through February 2015), housing prices were dropping in every major metropolitan market. During Spring 2015, prices continue to abate in most areas outside of affluent east coast cities but exhibited some firming in higher growth cities and therefore in national statistics.

The price degeneration has discouraged new construction, causing record reductions in the world price of all the raw materials mention in the first paragraph. New commercial and housing production has dropped 17 per cent in the last year (YoY). Yet, inventories continue to rise as sales continue to wane in most areas.

Another sign of housing industry troubles is that Kaisa, one of China’s largest housing developers has declared bankruptcy. A spread of bankruptcies could endanger world banking as many western private banks have provided construction financing there.

Overall, the real estate industry is important because it represents more than 14% of Chinese GDP in the $10 trillion economy, the world’s second largest. This percentage share is large in comparison to other countries throughout recorded history.   The housing industry has been a major employer and a driver of the countries double-digit GDP growth in the past two decades. Now the Chinese annual GDP growth rate is under 7%, perhaps not enough to employ all of the migrants from rural areas into the big cities. The slowing housing market causes a significant part of that slide in GDP growth.

Housing has been a principal source of saving and investment for middle-class Chinese. For some subcultures a man must own a house before he is considered desirable to marry. Housing has also acted as an instrument of speculation. Seeing rising values, those with adequate cash would buy multiple apartments just for the appreciation. As mentioned above, many of these are not rented out. They just remain vacant.

Recent housing policy has been erratic. At one point the government discouraged speculative buying to dampen price increases to improve housing affordability. During the 2009 financial crisis, credit was eased to use housing development as an economic stimulant. Then because of the fear of run-away debt, particularly in the difficult-to-control “shadow banking” sector, the central bank tightened credit. In 2014 a heavy crackdown on corruption included investigation of shadow banking abuses. Ergo, local officials are more reluctant to promote and invest in new housing. In the past decade, local governments, anxious to look good by helping meet national growth targets, sold off land and/or went deeply into debt to promote development.

Now, the national economic growth rate is slowing, both a cause of and an effect of reduced demand for housing. Fading prices have cooled the attractiveness of housing units as a form of speculative investment. Ghost towns are forming, not of new homes but in partially abandoned former mining and steel towns.

To mollify the slowdown, the national government has, in the last few months, cut interest rates 3 times and reduced bank reserve requirements. Yet, this policy risks greater debt levels and renewed shadow banking activity, and has put downward pressure on the value of the currency vis-a-vis the strong US dollar. The government also recently eased mortgage requirements, and softened restrictions on speculative buying.

Few are predicting an economic or financial meltdown. One assumes the government has powerful unused weapons to ameliorate the short-term economic slowdown, but housing policy does put the government in a long-term bind. Policies to solve one problem cause another. Their hope is that they can grow their way out of this box: With time, the housing inventories will mitigate and the debt overhang will be paid down. Yet, economic growth rates are in decline!

Some signs indicate that a housing recovery might not be far off. Inventories have moderated and prices have started to rebound in major eastern cities with less room for new development and tighter markets. However, the response of the market to the recent stimulant efforts of the national government have been more tepid than expected. What happens when the Chinese version of quantitative easing is not there? The answer to this question will affect the lives of people all over the world.

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China Housing at the Nexus

Autor: Roger Hamlin | Categoria: Economie

The Chinese housing industry is at the nexus of several force fields pulling and pushing people all over the world. The health of the Chinese housing industry strongly affects global prices of resources such as cement, steel, iron ingots, coal, natural gas and lumber. It also impacts global shipping rates since many of these raw materials are imported from places like Australia and Canada. And, the spillover of middle-class Chinese speculative fervor is being felt in the real estate markets in places like London, San Francisco and Vancouver.

So, what is the status of the Chinese housing industry? We have all heard of the Chinese ghost cities built on speculation but with few residents. Yet, in a housing market the size of China’s, even a ghost city might be a drop in the bucket in terms of housing supply. Driving around China, the ghost neighborhoods, new high-rise housing developments growing like fields of corn stalks in, or on the edge of big cities are more visible.

But what does the data show: Chinese data is sometimes murky. China does have a vacant housing inventory. According to some estimates, at average sales rates, soaking up the current official vacant housing supply might take 13 months. This includes both completed units and those not finished. Some estimate the inventory of completed units at only about 6 months. This data does not encompass vacant units owned by families for speculative purposes not on the market. According to some estimates only about 10% of vacant units are in the hands of developers. A much larger, somewhat unknown, inventory is the property of individual investors. This unusual inventory might not have short-term consequences since owners are not selling, but may be a long-term drag on the market.

The overhang has affected prices. In the fall of 2014 (through February 2015), housing prices were dropping in every major metropolitan market. During Spring 2015, prices continue to abate in most areas outside of affluent east coast cities but exhibited some firming in higher growth cities and therefore in national statistics.

The price degeneration has discouraged new construction, causing record reductions in the world price of all the raw materials mention in the first paragraph. New commercial and housing production has dropped 17 per cent in the last year (YoY). Yet, inventories continue to rise as sales continue to wane in most areas.

Another sign of housing industry troubles is that Kaisa, one of China’s largest housing developers has declared bankruptcy. A spread of bankruptcies could endanger world banking as many western private banks have provided construction financing there.

Overall, the real estate industry is important because it represents more than 14% of Chinese GDP in the $10 trillion economy, the world’s second largest. This percentage share is large in comparison to other countries throughout recorded history.   The housing industry has been a major employer and a driver of the countries double-digit GDP growth in the past two decades. Now the Chinese annual GDP growth rate is under 7%, perhaps not enough to employ all of the migrants from rural areas into the big cities. The slowing housing market causes a significant part of that slide in GDP growth.

Housing has been a principal source of saving and investment for middle-class Chinese. For some subcultures a man must own a house before he is considered desirable to marry. Housing has also acted as an instrument of speculation. Seeing rising values, those with adequate cash would buy multiple apartments just for the appreciation. As mentioned above, many of these are not rented out. They just remain vacant.

Recent housing policy has been erratic. At one point the government discouraged speculative buying to dampen price increases to improve housing affordability. During the 2009 financial crisis, credit was eased to use housing development as an economic stimulant. Then because of the fear of run-away debt, particularly in the difficult-to-control “shadow banking” sector, the central bank tightened credit. In 2014 a heavy crackdown on corruption included investigation of shadow banking abuses. Ergo, local officials are more reluctant to promote and invest in new housing. In the past decade, local governments, anxious to look good by helping meet national growth targets, sold off land and/or went deeply into debt to promote development.

Now, the national economic growth rate is slowing, both a cause of and an effect of reduced demand for housing. Fading prices have cooled the attractiveness of housing units as a form of speculative investment. Ghost towns are forming, not of new homes but in partially abandoned former mining and steel towns.

To mollify the slowdown, the national government has, in the last few months, cut interest rates 3 times and reduced bank reserve requirements. Yet, this policy risks greater debt levels and renewed shadow banking activity, and has put downward pressure on the value of the currency vis-a-vis the strong US dollar. The government also recently eased mortgage requirements, and softened restrictions on speculative buying.

Few are predicting an economic or financial meltdown. One assumes the government has powerful unused weapons to ameliorate the short-term economic slowdown, but housing policy does put the government in a long-term bind. Policies to solve one problem cause another. Their hope is that they can grow their way out of this box: With time, the housing inventories will mitigate and the debt overhang will be paid down. Yet, economic growth rates are in decline!

Some signs indicate that a housing recovery might not be far off. Inventories have moderated and prices have started to rebound in major eastern cities with less room for new development and tighter markets. However, the response of the market to the recent stimulant efforts of the national government have been more tepid than expected. What happens when the Chinese version of quantitative easing is not there? The answer to this question will affect the lives of people all over the world.




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