Charting China’s housing bust

Gavin Putland at the Land Values Research Group (LVRG) on Tuesday posted some interesting analysis on the China housing market gleaned from a chapter of the Reserve Banks of Australia’s (RBA) most recent Statement of Monetary Policy (chapter extract below).

According to Putland, China looks to be in the throes of a property crash, based on the fact that land sales, floor space sold, and home prices are all falling:

A typical recession, as I have noted many times [here and here], is precipitated by a bursting property bubble: property sales fall first, followed by property prices, then GDP.

My attention was therefore arrested by two graphs that appeared in Box A (“China’s Residential Property Market”) in the RBA’s latest Statement on Monetary Policy. The first (in the order in which I reproduce them) shows that land sales peaked around Christmas 2010.

The second (in the right-hand frame) shows that the peak in home prices came one or two quarters later than the peak in land sales.

The story concerning sales of floor space (in the left-hand frame) is more complex, perhaps due to changes in government policy: stimulus from late 2008 to early 2010, followed by various anti-speculative measures. But the subsequent peak in sales in late 2010 still preceded the peak in prices in 2011.

Rapid growth in prices through 2007 and 2008 caused rental yields to fall below 3%. Such low yields made price declines inevitable. Official loan/valuation ratios, which look conservative, must be regarded with suspicion on account of the “shadow banking” system. Price declines will hurt more than official figures suggest.

So it is sufficiently clear that we are witnessing the second stage of a housing crash. How this affects the productive side of the economy depends on a great unknown: how does a command economy deal with bank failures?

At only three pages in length, the RBA paper is well worth a read for anyone seeking a quick primer on the Chinese housing market. Some other useful pieces of information gleaned from the paper are as follows (direct quotes):

  • Attitudes towards buying property have changed considerably; the Urban Depositor Survey by the People’s Bank of China reported that between the December quarters of 2010 and 2011, the share of respondents expressing a preference to invest in real estate had fallen significantly, and the share of respondents expecting to purchase an apartment within three months of the survey dropped to levels not seen since 2008.
  • Confidence of developers has also been affected by lower sales revenue and expectations of lower property prices; the Business Climate Index for real estate has decreased towards global financial crisis levels, reflecting the tighter financial conditions many property developers have been experiencing (Graph A2).
  • Many developers have been scaling down their construction plans and reducing their purchases of land (Graph A3 – above).
  • As developers revise their construction plans for the coming year, slowing residential construction activity will have direct and indirect effects on GDP growth. Dwelling investment has become an important source of demand in China, with its share of GDP having increased from about 5½ per cent in 2004 to approximately 9 per cent in 2011.
  • The slowing in housing investment is also likely to have an indirect effect on growth as local governments rein in spending in response to weaker revenues – roughly 20 per cent of taxes collected by local governments are related to land, and land sales generate an amount equivalent to around 35 per cent of local governments’ current expenditure.
  • The main risks from the property market emanate from loans to property developers and, to a lesser extent, loans to local government financing vehicles. Loans to property developers are roughly 7 per cent of total loans outstanding. Financial institutions also have exposure to property developers through bond and equity holdings. [And] slowing land-related revenues could also create financial strains for local

[email protected]

Chinas Residential Property Market (RBA)


    • energywonk just like with Enron everyone gave Chanos all kinds of s$%t and he came out looking like a champ. Going to be the same thing here.

      • I didn’t give Chanos anything but applause. Followers of this site will know that I will be saying “told you so”, too.

        I’ve been a bit busy lately so am making brief and belated comment now.

        • Oh, but full marks for an excellent analysis on the beginning crash, Unconventional Economist. You too are one of the finest.

          I wonder how long it will take “China crash” to become received wisdom? An awful lot of politicians in an awful lot of countries are still counting on the “China anchor of the world economy” narrative.

          How long will it take, I wonder, for mainstream econ to actually wise up about the role of property in cyclical volatility, and the role of “supply” distortions?

  1. Good call Gavin Putland! Few identify falls in land prices precede the major downturns – here is a classic example.

    Debt is secured against land, hunky dory until prices begin to retreat shrinking the equity supporting the loan.

    Land has a long price cycle – 18 years usually. When it turns down, watch out!

    Australia has had a glorious garden party since the 1989-91 land price downturn. The current land price retreat will make 1888 look like a refreshing pause. In personal wealth creation and destruction, timing is critical. Ignore this at your cost.


    Don’t Buy Now!

    • Does “Don’t Buy Now!” translate into “SELL SELL SELL!?”

      Either way, I hope we’ve learned something from these previous cycles and can either effect a soft landing, or prevent it entirely.

      • Those choosing to sell had better be quick and prepared to work a sharp pencil.

        If history is any guide, in the immediate future, every viable buyer will be scooped up by banks offloading unwanted property and prepared to discount to clear.

        (In Manhattan) “In 1932, foreclosure sales were 75 per cent of all sales, in 1933 they were 98 percent and in 1934 100 percent.”


        Under these circumstances, private vendors simply cannot exit.

        Anyone without a mortgage is safe – provided they are willing to accept balance sheet erasure.

        Those with a big mortgage… Errr…

    • I have been waiting for this crash for ten years, and now at maximum pressure and anger from my wife it now seems here. The banks are trying to raise dumb retail money following the covered bond debacle and new mortgage lending is not profitable at current levels of interest rates. No doubt I will be unemployed with a great many Aussies but I wont be bankrupt.

      • I know the feeling, Steve R.

        “The market can remain irrational longer than you can remain solvent”, some guru on Wall Street said once.

        And a housing bubble can remain unburst for longer than a wife, parents, girlfriend, well meaning spruiker friends and relatives, etc, can remain respectful of a property skeptic.

  2. So is it the belief of this website that the RBA can analyze Chinese property better than it can analyze Australian property?

    • As much as everyone likes to bash swanny, the RBA has the same issue as the treasurer. They can’t openly admit to the Australian people about the core issues that are hurting Australia. Imagine the panic that would ensure if the government and RBA admitted Australian property prices were too high and that they were going to take action to fix the problem.

      Every baby boomer, every investor everyone with a loan would try and head for the exits ensuring mass hysteria and a commitment to economic suicide.

      • Good question Towelie. I think the answer clear. According to most here, it’s conspiracy rather than lack of capability.

      • its realpolitik, not conspiracy bellyboy

        I’ve long gotten over the idea that the world’s ills are because of smoke filled rooms with anonymous men in suits conspiring to get ill gotten gains…

        Its politics/uncertainty and unintended consequences – most of the time by the public’s own making.

        Australia’s (and Anglosphere) obsession with house prices is not a conspiracy made by the cabal above – its because we are what we are

        • (following on from The Prince)
          .. and it was profitable, for those who own and run the world, to provide the loans to us to buy houses & etc.

      • “Every baby boomer, every investor everyone with a loan would try and head for the exits ensuring mass hysteria and a commitment to economic suicide.”
        Nicely put. As nothing is ever really new under the sun I recommend a great tale called ” The land Boomers by Michael Cannon, hard to get a copy but it lays out in detail what happened at the last major Aussie real estate mania.
        I think it will be more brutal with a great deal of human suffering

  3. Yes, good get, Leith. We’re seeing the banks, Alcoa, Qantas putting people off here and this doesn’t just happen in a vacuum. My guess is that in China or Australia, people are much the same. Incipient drops in their land prices will have them windy about the mortgage. As they zero in on paying down debt they’ll spend less, and the press will characterise the reality check as a ‘loss of confidence’. I think the delayed super-slo-mo train wreck is now under way both in China and Oz.

      • Yes, agree. Canada was slow out of the blocks, putting more into their residential boom/bubble in more recent years. For whatever reason, they weren’t in synch with the US. We were VERY closely behind the US, however, so IMO the outcome from our e-x-t-e-n-d-e-d bubble is almost certainly going to be worse than Canada’s.

        • The OECD said even in 2010 that there had never been so many house price bubbles in so many nations simultaneously before.

          I say “urban footprint reduction” mania all over the world has a lot to do with this.

  4. The fall in the last month or two may or may not be indicative of a sustained fall. I think there is also something this year about the timing of Chinese New Year.

    What puzzles me is that in spite of the compound growth of around 10%pa average for a decade, there is little evidence of it in the graph of land purchased or in the SSE180/Shanghai Composite.

    At 10% pa the doubling time is 7 years. If GDP has grown at 10% compound why hasn’t land area purchased also increased more dramatically.

    • We’ll keep reporting interesting reports/data/stories on China when they come to hand be they ‘pro-bubble’ ‘anti-bubble’ or indifferent. It’s a highly contestible area with uncertain outcomes. While I am in the Chanos camp, I am by no means confident in my position. There are just too many unknowns.

  5. the eastern city of Wuhu suspended a decision to ease property curbs three days after its announcement, signaling that the central government won’t relax policies any time soon. The Wuhu reversal clearly shows that the stock market has severely underestimated the central government’s political will to cool the housing market significantly further

    if things are so bad or getting worst, then what in god’s name is China government upto?

  6. Any hard or soft landing in China will be short term. I believe this is also Chanos’s view.
    Long term i believe China will keep expanding and growing, but not at the ‘stimulated’ rate.
    The locals will see any down term as an opportunity to buy.
    This article on CapitaLand in the AFR today spells this out, need to look at the whole SE Asia region pulling itself out of poverty.

  7. An American friend of mine passed me a real estate magazine from Indiana. Kind of a fly-over State I guess but the communities there look rather pleasant.

    I can only describe it as “Real Estate Porn”.
    I was gob smacked by the difference in RE prices between us and there. For the same price as a dog box in Sydney’s western suburbs you can buy a 4 bedroom, 2 bathroom lakeside house just 10 mins or so from downtown.

    Not many things I envy about the USA but affordable living is now one of them.

    • Incidentally, Indiana is a state that does not have “smart growth” or “growth management” rules and regulations in effect that strangle urban land supply. Accordingly, land is cheap (as it is not artificially restricted) and housing is affordable. House prices also remained relatively stable throughout the credit boom.

    • Go online and check out Chicago prices. One of the major cities in the USA — a better city than any of ours IMO, notwithstanding the lack of footy and cricket — but prices there are cheaper than what you will find in our major cities.

      And as with Indiana, once you get into the major provincial cities (say Geelong, Newcastle size) in Illinois you can get yourself set in a leafy suburb with a 4 bedroom house for well under half a mill and have change left over for a flash car (also much cheaper there) and an expensive holiday to the caribbean.

      • Did you know that there are Aussie investors buying up whole blocks of houses in Detroit, where a combination of already-affordable conditions and principal industry collapse has led to houses being less than half the price of the merely “affordable” cities?

        I pick the investors are right, Detroit will “come back”. The low urban land values are a help, unlike Britain’s rust belt, where strict urban planning means that even under “rust belt” conditions, house prices never fall to “affordable”, let along levels at which the local economy can rejuvenate.

        Australia might need to learn this too one day.

  8. Yeah thats what my friend said.
    He reckons prices have dropped in Indiana a bit since 5 years ago but not as much as in other states.