Grant's Interest Rate Observer

China Real Estate Crash?

Rising home prices are an economic salve of the highest order.  Is the reverse also true?  An article from today’s Wall Street Journal suggests we may soon find out.  The Journal’s analysis concerns a regulatory-driven slump in the world’s alleged fastest-growing major economy.

In Beijing and Shanghai—two of the country’s largest markets—and other megacities, sales have stalled and prices have dropped, falling slightly in some pockets and dramatically in others.

Demand has dried up in these areas as a result of government measures including higher mortgage rates, higher down-payment requirements and limits on buying a second or third home. Would-be sellers are increasingly putting plans on hold in hope that prices will rebound.

It is cold comfort for China’s homeowners, would-be purchasers and speculators alike that the regulatory broadside could have been worse. The Journal also notes that “Beijing has held off on introducing an anticipated property tax that could curb speculation but damp prices.”  Nevertheless, the effects have been significant.  New home sales in Shanghai and Beijing, which hovered between 10,000 and 15,000 per month in each city through most of 2015 and 2016, slumped below 5,000 by the fall of 2017 (the property controls were implemented in late 2016).  Home prices in those two cities are virtually unchanged year-over-year, a dramatic reversal from the fall of 2016 when prices in Shanghai and Beijing logged gains of 40% and 30%, respectively.

Whether the housing downturn is merely a temporary “reset” or something more severe, the implications for the Chinese economy should be worth monitoring.  Moody’s estimates that the property market accounts for nearly a third of Chinese activity.  Already it appears that credit creation in the world’s second largest economy is foundering:  Chinese credit impulse, or new credit as a percentage of GDP, jumped from less than 22% in May of 2015 to well above 30% by early 2016 amid the percolating housing market.   After holding steady for the rest of 2016, that key metric gradually faded through 2017.

The calendar provides another simple yet potentially important contrast between China’s recent economic acceleration and its future prospects. The 19th Party Congress, the communist party conclave at which President Xi consolidated his authority last fall, has come and gone. The Foreign Policy Journal noted on Oct. 27 that:

The Communist Party of China Congress, held twice per decade, was a test of Xi Jinping’s efficacy as President. Leading up to the meeting, he had strongly urged all departments to turn in positive economic indicators. This drive for growth was accomplished through exports, infrastructure investment, real-estate, and debt.

Could China’s recent economic boom, politically engineered via the pulling forward of future demand, leave the nation vulnerable to a not-so-pleasant 2018?  The industrial metals may tell the tale:  Copper prices are roughly 65% above their interim lows reached in early 2016. Iron ore, although 30% off its early 2017 highs (see the Jan. 13, 2017 Grant’s, “Sell a non sequitur,” for more), still sits 73% above its late 2015 nadir. Steel rebar is a hearty 146% north of its end-of 2015 lows.