This time Chinese property will bust

Late yesterday China released its April economic data and the tale it tells of the property sector is of concern. New starts contracted 15% year on year (vs. -21.9% in March), property sales fell 14.3% year on year (vs. -7.5% in March); and land sales  fell 20.5% year on year (vs. -16.9% in March). This chart is from Society Generale:

China Housing cycle_0

George Magnus sticks his head up at the FT to make sense of it all:

The greater risk to China lies in the pervasive consequences of any property bust. Property investment has grown to account for about 13 per cent of gross domestic product, roughly double the US share at the height of the bubble in 2007. Add related sectors, such as steel, cement and other construction materials, and the figure is closer to 16 per cent. The broadly defined property sector accounts for about a third of fixed-asset investment, which Beijing is supposed to be subordinating to the target of economic rebalancing in favour of household consumption.

…The reason things look different today is the realisation of chronic oversupply. As the property slowdown has kicked in, housing starts, completions and sales have turned markedly lower, especially outside the principal cities. Inventories of unsold homes in Beijing are reported to have risen from seven to 12 months’ supply in the year to April. But when it comes to homes under construction and total sales, the bulk is in “tier two” cities, where the overhang of unsold homes has risen to about 15 months; and in tier three and four cities, where it is about 24 months.

…If activity levels and prices weaken further, Beijing’s resolve not to respond with traditional stimulus programmes is unlikely to hold. We should expect a potpourri that might include: extra spending on infrastructure and environment programmes; faster urbanisation in inland and western provinces; some relaxation on restraints on homebuying, such as mortgage deposits; and, ultimately, new monetary easing.

That sounds right to me. We can also expect slower growth despite the offsets. Capital Economics explains why:

The problem in the property sector is not that there is a price bubble, as many have argued over recent years. It is that property construction has been growing at an unsustainable rate. On average, property starts have increased at a real rate of 16% each year since the turn of the century, with a massive surge in new projects in 2009, when credit controls were loosened and local governments gave the go ahead for a vast number of projects to support employment.

As a result, the number of new properties being released onto the market each year has been rising fast. Residential property completions have risen to about 10 million units last year, from five or six million a few years ago.


To put this in perspective, China since the turn of the century has built residential property equivalent to the entire housing stocks of the UK, Germany and France combined. And the number of new properties continues to grow each year. Residential investment simply cannot continue at this pace. The usual argument is that urbanisation will drive continued increases in new residential demand. But that’s not what the most authoritative projections show.

For example, the UN’s most recent estimates of increases in China’s urban population show that the pace of urbanisation has already peaked. China’s government recently published a policy document on urbanisation. Its projections show exactly the same: slower growth in the urban population over coming years than in the recent past.


Of course, there are other factors driving urban residential demand, such new household formation by existing urban residents, and the need to replace old housing stock.

But the big picture is unchanged. The upshot is that there is a mismatch in the real estate sector, with the number of new properties being built increasing each year, but no such increase in the underlying drivers of demand.

Attention Pascometer! China can keep building at an astonishing rate but if it’s not as much as the year before then growth slows. It’s the most misunderstood notion in economics, it’s the rate of change that matters, not the absolute level.

Capital Economics sees 7% growth this year and next then 6% in 2016 as authorities react in the way Magnus describes. I’m a little more bearish than that and not so sanguine about the downside risks. As Magnus concludes:

China is different from the west in many ways but the real economic effects of a burst property bubble are the same the world over.

Houses and Holes


    • Great video but doesn’t that emphasise the problem?

      They have no real limits on cranking out vast quantities of new supply fast.

      The only real question is whether they can crank out supply that the average worker ( as against specufestor) can afford to buy.

      That seems to be the catch.

      If they cut prices to meet the market the model of local govt finances goes belly up.

      Govts living on $ extracted from debt lent on property transactions. That old story!

      • And that begs the question of how long it will be before provincial governments begin to default as rural land conversion dries up?

      • Houses have become cars.

        Once upon a time cars held their value, even increased.

        Imagine buying a car now, as an investment.

      • Leviathan, I’m told our top auctions are selling Mercs & Beemers at half price or below at 3 yrs old, when leases run out. Many vehicles have less than 75,000klm on them with engines rated as 400,000 klm before major repairs contemplated.

        Global channel stuffing –

      • The Patrician

        Wow, thats alot of cars.

        All the more reason to remove the paralell import restrictions, tariffs and the LCT.

        Get on with it Joe.

  1. RBNZ warns of China risks

    RBNZ says bank system sound, but over-valued housing and high household and dairy debt remain risks; China slump also a risk |

    New Zealand’s Bubble Economy Is Vulnerable | Hugh Pavletich | Scoop News

    … and Australia ? …

  2. How does the 10 million new units last year noted above tally up with the Nomura estimate of 2,596 million square metres, as reported by Ambrose Evans-Pritchard of the UK Telegraph recently ? …

    … excerpt …

    “Nomura said residential construction has jumped fivefold from 497m square metres in new floor space to 2,596m last year. Floor space per capita has reached 30 square metres, surpassing the level in Japan in 1988.”

    Is the true figure way higher than the 10 million units mentioned, due to illegal building, dubious reporting and other factors as Mr Mao of Vanke mentioned in his recent speech ?

    Mao’s build rates per 1,000 population overall and for specific metros are astronomical.

  3. Stimulus now! I thought the Minerals Council team in Beijing would have delivered by now.

    What’s happening 3d1k?

  4. My question is: what does “burst” mean? There are many Chinese holding their cash back, hoping to buy cheaper properties. What really is bad is to have Japanese style of 20 years recession.

    • Hugh PavletichMEMBER

      Gral … Hamish Douglas of Magellans perspective on China is helpful, although there is nothing new in what he said.

      It is however pleasing Mr Douglas touched on the structural property issues … and the likely extent of oversupply.

      There are two major structural aspects he could have discussed though.

      First … the “multiple stretch” (median multiples) in China appear way beyond those of the US and Ireland back in 2007.

      Secondly …. the extent of the overbuilding is not clear … but the “build rates per 1000 population per annum” Mr Mao of Vanke spoke of recently for the Chinese metros are way beyond the figures reached in the US, Ireland and Spain.

  5. China property downturn would be painful but salutary –

    Interestingly, there has not been any discussion about how the substantial deposits are financed. Likely there is much inter-family lending been going on under the radar screen.

    It was reported at FT in another article that a third of the residential property is owned by one percent of the population. Likely a significant amount of this has been financed out of corruption money. With the current “corruption crackdown” it would seem likely some of this residential real estate (likely much of it vacant) will be put back on the market.

    • The take home message is the last paragraph.

      What is certain is that China’s demographic profile is already changing the economic calculus. The workforce contracted by 3.45m in 2012 and another 2.27m in 2013. For better or worse, China is already starting to look very like Japan.

  6. Hugh, it seems you have most of the latest media intrugue… This will be a nuclear financial detonation when it (NOT IF) it happens… From 1 to 25 trillion in 14 years ~compounding at 15% p.a+ with negative demographics (6.5 million population growth rate presently) & our economy ‘on steriods’ due to this monetary deluge.

    • @Peter_w

      But you don’t understand the Chinese and how they think about property and how this is all part of the grand plan…


  7. I do understand… compound any numerator & denominator at two different rates &you approach mathematical infinities

  8. I am in Chengdu at the moment and there are 8 thirty story or so high rise apartment building being constructed just a few metres away – I know because I hear them working all night 7 days a week.

    As I gaze out from the top of my apartment block, there are others doted about.

    You can argue the economics all you like but what I see is an incredible work ethic, incredible commerce and people with savings (and a country with savings, although whether they are safe in America’s hands, who knows) – with a population of 1.4 Bill or so, that is a lot of people working, doing business and saving.

    Aus just had the “budget it had to have”, with the great unwashed howling in protest as the libs belt them over the head to get them out of the welfare trough. How many of Aus’s 24 million or so are working, doing business and saving?

    So, you economists and ‘experts’ you can look up your clacker and measure your piles till the cows come home …. but I suspect you have it wrong …. as usual.