China new home prices bounce

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Cross-posted from Investing in Chinese Stocks.

44 cities up, 56 cities down in the January 2015 CREIS report.

The overall increase in January was 0.21% mom. New home prices in the top ten cities saw an increase of 0.59%. However, the top ten cities also saw existing home prices fall 0.53% in January. Beijing was the extreme example: new home prices increased 1.15% and existing home prices fell 0.74%.

The result comes after local governments in China threw everything, including the kitchen sink, at the real estate market in January. Buying restrictions are gone, taxes are cut, subsidies are available and public housing funds are easier to tap than ever before. The result was the 0.21% increase reported by CREIS. The full court press comes as cities worry they are in the eye of a monster deflationary hurricane, with four distinct problems.

One is the collapse in real estate investment, which has fallen far below the growth in fixed asset investment:

Second is oversupply in third- and fourth-tier cities, much of it in the wrong place. Many cities with large housing inventory still lack housing at the low and middle end of the market. Some of these cities also have net population outflows.

Third is the financial risk. Land sales are used to repay government debt, while real estate sales back trust products. Kaisa may be an isolate example, or it may be the first sign of systematic financial risk, the first casualty as Pandora’s Box opens.

Finally there are rising debts and falling revenues at the local level. Many governments may see cash flow slow to zero or even turn negative due to the lack of land sales in the second half of 2014. It takes a couple of quarters to settle land sales, so the slowdown in 2014 will hit hardest in Q1 and Q2 of 2015. Without positive cash flow, cities cannot fund their local projects and real estate development, which goes back to the first problem of a collapse in real estate investment…

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.