Nomura: China’s property bust is on


Cross-posted from Investing in Chinese Stocks.

Nomura has called it: China’s Property Bubble Has Already Popped

China’s great real-estate bust has begun, says Nomura. A combination of a huge oversupply of housing and a shortage of developer financing is producing a housing market downturn that could drive China’s GDP to less than 6% this year.

“To us, it is no longer a question of ‘if’ but rather ‘how severe’ the property market correction will be,” three Nomura analysts wrote in a report released Monday. And there isn’t much the government can do to head off problems.

“There is no policy that is universally right,” says Nomura analyst Zhiwei Zhang.

I don’t think Nomura is necessarily early in their call, but as I pointed out in yesterday’s post, right now the data is not as bad as in 2012 and the anecdotes are at roughly the same level—though May Day sales were worse and could mark a turning point. The big difference is the credit tightening and the leadership’s insistence on no stimulus. The shadow banking system is contracting at the edges, which is what matters for the small marginal developers, and it is not hard to imagine 2014 being much worse that 2011/2012 when all is said and done. However, the 2011/2012 slowdown was a year-long process and this slowdown is only about 6 months in (ignoring that the credit tightening goes back to June 2013). I thought the market would crack in 2011/2012 and it didn’t, and it looks worse now based on more debt and higher prices, but the data (from April) doesn’t yet show the market cracking.

The GDP estimates are way too optimistic for a bubble bursting. Even if this crisis is more akin to the S&L crisis in the U.S., the real estate market is a larger portion of the domestic economy here. As the article notes, steel and cement alone are estimated to be at least 16% of GDP, and those are the conservative estimates. Steel heavy Hebei already has GDP growth below 5%, and buildings are still going up all over China (one is actually going up right outside my window).

Plus, there’s psychology at work. The country isn’t going to see a major pillar of the economy take a big hit with no knock on effects. Even if it only lasts a few weeks, there’s likely to be a panic phase that rattles the financial markets. The cash crunch in June 2013 rattled Chinese markets and that was little compared to what could be coming if the real estate market has peaked and is headed for a major decline. This shift will be massive because so few people inside or outside of China are seriously even considering a crisis in China. Everyone calls it a slowdown, and even Nomura says a hard landing is “four consecutive quarters of GDP growth below 5%.”

The analysts almost always get the magnitude wrong, even when the get the trend change correct. A better number isPettis’ 3-4% average GDP growth prediction. If there’s a crisis, then growth will fall below 3-4% in order for that to be the average growth rate going forward. I think Pettis’ number is a far more conservative estimate and one can imagine a far wider range of scenarios that can fit within that estimate.

Finally, there is also far lower political risk than believed. The threat is to the leadership, not to the party, if growth rates fall. This is why Pettis made the astute comment about Xi consolidating power. At this point, the leadership has been explicit about reform over stimulus and if they have internal support (or internal control), they can accept much lower GDP growth figures.

This has hit the wires in China just as fast: 野村:中国楼市调整已开始 若不刺激情况将更糟 but the Chinese headline is more anodyne: the real estate adjustment has begun.

The government has lousy policy choices, Nomura argues. Continue with minimal stimulus and GDP growth could fall below 6% this year. On the plus side, developers wouldn’t add much to China’s long-term housing and debt problems.

Alternatively, ramp up monetary and fiscal policy by, say, cutting by 0.5% the reserves that banks hold in the central bank and by turbo-charging government spending, and the government could achieve 7.4% growth this year, Nomura estimates.

But taking that route would only worsen China’s housing glut and delay the downturn by a year, the investment firm argues. In 2015, Nomura estimates, GDP would slow to 6.8%. While delaying problems for a year could give leaders more time to put in place reforms that could help China over the long term, Nomura also says China would have a one-in-three chance of GDP growth falling even faster by the end of 2015 and starting a “hard landing,” which it defines as four consecutive quarters of GDP growth below 5%

Meanwhile, here’s an article that takes a different tack on the issue of government bailouts, with a developer saying the governments will do it to save themselves. There is truth to this argument, but it still may be wishful thinking by developers.

Summary: Thus far there have been rumors of rescues and developers calling for rescues, but no government initiative. Now at least one developer says that in areas where prices haven’t even really started to fall, the government is worried. The developer says once you understand how much local governments rely on land sales, you can understand why they will intervene in the market.

Already there have been some relaxing of restrictions in Nanning, Wuxi and the Hangzhou Xiaoshan district, the latter of which lowered the cost for developers bidding on land.

The article touched on supply issues and the source of pressure on the real estate market. It cited Mao Daqing’s comments on inventory; he reportedly said based on current sales rates, twenty-one cities have over 12 months of inventory, nine cities over 24 months, among them, Wuxi is at 57 months, Tianjin 39 months, Hangzhou and Shanghai at 33 months and 29 months in Shenzhen.

Centaline’s research director Zhang Dawei said the biggest pressure on real estate is coming from the credit market, followed by inventory and changing expectations. He said credit is the most important, even if purchasing restrictions are eased, if credit is tight the property market will cool.

房企称降价被救市打乱:还没怎么跌 政府比我们还着急

Recently, Nanning, Wuxi, Hangzhou Xiaoshan District, through deregulation purchase , down home buyers a standard way of rescue, and the days JINBIN [ Introduction News ] Sea, Fuzhou, Zhengzhou official has released a message, to be classified, sub-regional policy for buyers be adjusted.

“No how prices fell, the local government than we hurry.” A project in the country and more developers have to “China Times” reporter bluntly, local governments rely on land finance inertia is difficult to change, as long as understand this, Government will certainly knew bailout.

“Now would save the city, why should the price? Carry while passed.” Above the developers said. Housing prices in Hangzhou, a senior, also said the purchase of deregulation is expected, to some extent disrupted the company had wanted to price change of rhythm.

Where intensive rescue

April 28, Nanning City Housing Authority issued a document that, since April 25, 2014, Beihai Guangxi Beibu Gulf Economic Area, Fangchenggang, Qinzhou, Yulin, Chongzuo residence households can refer to permanent residents of family policy in Nanning in Nanning purchase.

In fact, many cities are looking to relax the regulation of the breakthrough. Wuxi announced that from May 1, the city threshold of home buyers from 70 square meters to 60 square meters; Hangzhou Xiaoshan District land through bidding gold down to relieve pressure on the developer the cost of capital; Zhengzhou City Housing Authority said In the case of national policy to allow, in the future will likely according to market conditions, to purchase the policy adjustments in a timely manner. Meanwhile, Henan province also plans to introduce policies to encourage the rural population to buy a house located in the county.

The industry believes that this tentative relaxation in several cities will follow the lead of other cities.

“Now place mostly curve bailout, central policy underscores this temptation.” Shenzhen, a listed room rate executives said the general characteristics of the local rescue, are the first to emerge, such as the humble city, if not to be stopped, Other cities will be further relaxed regulation scale release.

As in 2012, the first bailout, such as Wuhu, Foshan, Zhuhai, are contrary to market expectations of third-tier cities.

“Shenzhen was also reserves the bailout policy, but was stopped after a few small cities, Shenzhen will not out, but fortunately the second half of the market is getting better.” Shenzhen Municipal Land and Housing Bureau insiders told reporters that the current “two-way control” of policy guidelines so that first-tier cities dare to act rashly.

“The current prices do not move up, too much inventory in many cities, too many can not sell the house, cancel the purchase has its own rationale, if you wait until fall Bureau of price data, adjustment policies go too late.” Shenzhen a leading housing prices executives said.

Prior to market rumors Hangzhou relax in the “51” after the purchase, but as of May 5, no measures introduced.

“Hangzhou property market is very good, but due to the high degree of public concern, yet dared the city to cancel the purchase, up to a few stock first large suburban relax.” Housing prices listed above are examining executives recently Hangzhou property market, he said Hangzhou land if dropped, local governments will be very difficult. Zhejiang Province in the first quarter than last year GDP grew by only 7 percent, the government clearly to stimulate economic growth, real estate is the fastest, especially in Hangzhou, Ningbo city of the province to purchase such a large crowd appeal.

“While the government to relax the regulation will be very cautious, but to wait any longer, or will save time.” He said.

Difficult to reverse the price expected

Currently, the property price surge is sweeping the country, the price sound come second and third tier cities, while tier cities have not been spared, the recent emergence of high-end real estate 7.2 fold Shanghai sale, price reduction due to a real estate Xixiang “51” lead owners rights.

Local government bailout impulse, gave developers are trying to reverse once the market price is expected to opportunities. A developer who Changsha told reporters bluntly, “will certainly affect developers bailout mentality, at least not so pessimistic.”

The Chairman of Wharf China Chow On Kiu public real estate companies, “said the future does not deliberately continue to cut prices, while not excluding the price we waiting for the next local government deregulation policy is expected within the next few months, there will be some different places loose policies, while sales in some places will make adjustments based on loose change. ”

Call Nanning “51” correspondent Imperial Dragon Optical Washington [ News Price apartment review time], the sales staff in order to release the purchase as selling points, “added a lot of invisible people who have qualified for the promotion of housing prices is certainly have an impact. ”

“Do the marketing people say it Do not take it seriously, depends on whether the bailout will improve volume, no deal, who would the price? “Housing prices listed above executives said the current round of bailout behavior helps boost home buyers confidence, but the effect is limited because local governments can not make adjustments to the critical “credit limit” policy.

“There are many stocks the hands of developers now have a chance to rescue ship quickly, but also the price is not a fool?” These leading housing prices in Shenzhen executives admitted to reporters, 2014 will be a process to inventory, home prices will continue to cool.

Vanke [ Introduction News ] Vice President Mao Daqing Sharon recently revealed in an internal, consumer deposit ratio in most cities rose 21 cities over 12 months, nine cities over 24 months, which, Wuxi 57 months, 39 months Tianjin, Hangzhou and Shanghai to 33 months, 29 months in Shenzhen. The ratio is also in wholesale deterioration, in addition to Beijing, Shanghai is relatively good, the other cities are bad market conditions.

Central Plains real estate market research director Zhang Dawei that now developers cut prices mainly for three reasons, first, tight credit, followed by the inventory pressure, the third is expected to have changed. The credit is the most critical factor in this year, even if full liberalization of the purchase, if still tightening credit market will still be cool.

Houses and Holes


    • casewithscience

      When people start forming “homeowners associations” and “trade unions”.

      Scares the shoot out of our governments.

  1. Pfh007MEMBER

    Time for the RBA to calm the situation in China by explaining that if construction slows because few of the peasants can afford to pay the price of new homes, there is a simple solution:

    1. Make debt more easily available to peasants.

    2. Cut interest rates

    3. Issue reports that ‘prove’ the house prices are reasonable.

    4. Move the debate to discussion of ‘affordability’, mortgage ‘servicing’ and talk about a permanent new plateau

    5. Encourage reality TV programs revolving around the excitement of repainting walls in Tuscan red.

    Problem solved!

    • Pfh007 … they are doing their best in Auckland … working on the “affordable” $1 million home ….

      Affordable? Yes, if you can bid near a million – Property – NZ Herald News

      … but they are in no hurry to build new affordable stock …. Building Consents Issued – Statistics New Zealand …

      Doing “consent / build rate per 1000 population per annum” calculations nationally and for the metros and regions in NZ, makes for a very interesting read indeed !

      • Pfh007MEMBER

        Ha – it sounds like an ANZAC delegation of Central Bankers might be able to provide real assistance in helping Beijing come up with innovative solutions to the age old problem of houses too expensive to live in.

    • You forgot to specify 1.(a) Interest-only loans, and 1.(b) open-ended / “flexible” amortisation (ie, generational indebtedness).

      Your comment immediately prompted to mind the report by the Swedish CB kindly linked by Gunna recently, titled “How the Swedish mortgage market has shaped the financial system” —

      I found some of the observations on this from the world’s oldest central bank — that is to say, one having (presumably) the longest period of accrued experience in the dark art of national blood sucking via usurious lending — to be rather telling. Something of an object lesson for others, perhaps, in how to keep extending the life of a usury-based, population-enslaving financial ponzi scheme out for as long as (sub)humanly possible:

      “Amortisation is when a household repays part of its loan. There is no statutory requirement for households to amortise…

      Mortgage contracts often run for 30-50 years and, theoretically, this means that the loan should have been repaid by the time the contract expires. In practice, the rate of amortisation varies from bank to bank and from borrower to borrower, and it is not unusual for the amortisation rate to mean that it will take more than 100 years to repay a loan[33].

      [33] In the random sample taken in the autumn of 2012 on conjunction with Finansinspektionen’s mortgage survey, the average repayment period among households with a loan-to-value ratio below 75 per cent, and which actually amortised, was 140 years.

      I would urge readers to carefully contemplate why it is that banking institutions become, over time, and coincident with increasing household debt levels, happier to lend “money” on interest-only terms, or with “flexible” views as to the amortisation of the loan.

      The reason why should be obvious to any thinking person. It is because the initial loan principal really doesn’t matter very much to them. It is just an electronic bookkeeping entry. There is no benefit to the usurer in the act of creating, ex nihilo, the debt principal itself.

      Their profit, is all about the interest payments. The contractual obligation — enforced by the power of the state — to repay MORE than the initial sum of digits borrowed.

      As the debt pyramid grows and grows, and more and more of the population’s income (from making/selling stuff) is consumed in debt repayments, at some point beginning to act as a brake on the individual and collective willingness to take on an ever-greater volume of usury-bearing debt, inevitably, the usurers will seek to keep their ponzi scheme alive. How? Per above.

      It’s all about the usury.

      • Yes Shakespeare was alert to the issue.

        “Neither a borrower nor a lender be; For loan oft loses both itself and friend,

        And borrowing dulls the edge of husbandry. “

      • Polonius: Fare you well, my lord.
        Hamlet: These tedious old fools!

        (Hamlet Act 2 Scene ii)

        Not sure that’s Shakespeare’s opinion you are quoting

      • I prefer Ezra Pound’s Canto XLV —

        With Usura

        With usura hath no man a house of good stone
        each block cut smooth and well fitting
        that design might cover their face,
        with usura
        hath no man a painted paradise on his church wall
        harpes et luz
        or where virgin receiveth message
        and halo projects from incision,
        with usura
        seeth no man Gonzaga his heirs and his concubines
        no picture is made to endure nor to live with
        but it is made to sell and sell quickly
        with usura, sin against nature,
        is thy bread ever more of stale rags
        is thy bread dry as paper,
        with no mountain wheat, no strong flour
        with usura the line grows thick
        with usura is no clear demarcation
        and no man can find site for his dwelling.
        Stonecutter is kept from his stone
        weaver is kept from his loom
        WITH USURA
        wool comes not to market
        sheep bringeth no gain with usura
        Usura is a murrain, usura
        blunteth the needle in the maid’s hand
        and stoppeth the spinner’s cunning. Pietro Lombardo
        came not by usura
        Duccio came not by usura
        nor Pier della Francesca; Zuan Bellin’ not by usura
        nor was ‘La Calunnia’ painted.
        Came not by usura Angelico; came not Ambrogio Praedis,
        Came no church of cut stone signed: Adamo me fecit.
        Not by usura St. Trophime
        Not by usura Saint Hilaire,
        Usura rusteth the chisel
        It rusteth the craft and the craftsman
        It gnaweth the thread in the loom
        None learneth to weave gold in her pattern;
        Azure hath a canker by usura; cramoisi is unbroidered
        Emerald findeth no Memling
        Usura slayeth the child in the womb
        It stayeth the young man’s courting
        It hath brought palsey to bed, lyeth
        between the young bride and her bridegroom
        They have brought whores for Eleusis
        Corpses are set to banquet
        at behest of usura.

        Or, for the sadly growing number of simpletons who struggle with reading and comprehension, there’s the dramatic video version —

      • Pfh007MEMBER


        “..Not sure that’s Shakespeare’s opinion you are quoting..”

        Are you suggesting that Bill Shakes did not personally hold the opinions of all his characters!

        Perhaps he was just ‘alert to the issue’ raised by the opinions of his characters. 🙂

  2. notsofastMEMBER

    I can’t see the CCP managing a property bust while they manage a large scale rebalancing from investment to consumption. Rebalancing is the priority. So if the CCP gets its way, there will probably be a property stall yes, but a property crash no.

    Nomura seems to be saying the CCP may not be going to have it all their own way in this regard. It may also have a geopolitical aspect, in that it could be Nomura’s way of highlighting the need for and the importance of a Japan China dialog which seems to be making news at the moment.

  3. I wish people would stop calling it a property bust.

    It’s an official property redistribution phase as part of the broader transition to a consumption based economy.

    They can move millions of peasants back into service based jobs in major urban centres without having to build a single apartment whilest wiping out the entire destabilising debt problem.

    WIN, WIN, WIN and WIN !

    I think the big investment is going to be in Barrista courses and fedora manufacturing.

  4. Willy2MEMBER

    “Could drive GDP below 6%” ????

    Could ??? Will drive GDP below 6% !!!