The major point is Chinese property is much larger in GDP terms than anywhere else and you need to add negative wealth effects as well if it deflates. Goldman:
China’s property sector has been in focus given intense regulatory pressure on developers’ leverage and banks’ mortgage exposure, and consequent contraction in sales and construction activity. Given recent weakness, it is natural to ask how significant a hit this could pose to the economy.
A wide range of estimates for the scale of China’s property sector — up to about 30% of GDP — have been reported in the media and by other analysts. Different definitions of the scope of the sector largely account for the disparity.
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The most important distinctions are what types of building are included(residential, nonresidential, or all construction including infrastructure), what economic activity is included (only the construction itself, or all the value-added embedded in the finished residence e.g. domestically produced materials), and whether related real estate services are also included.nA narrow definition of “residential construction activity as a share of GDP” could be as low as 3.6% of GDP. Expanding this to include all related domestic activities – e.g. materials like metals, wood, and stone produced domestically and used in housing construction, as well as services like financial activities and business services used directly or indirectly by the housing sector – would account for 12.4% of GDP. Adding nonresidential building construction and its associated activity would take it to 17.7%. Finally, including real estate services—which show a high correlation with broader property trends—would take the number to 23.3%. (All these numbers are based on detailed 2018 data, and exclude infrastructure spending not directly related to residential and nonresidential buildings.)
The property sector’s share of the Chinese economy has grown fairly steadily over the past decade, after surging in the stimulus-fueled recovery just after the2008 financial crisis. On the narrower definitions for which we have up-to-date data—construction and real estate activity—the sector is slightly larger now than it was in 2018.
Goldman is also catching up to MB on the underlying drivers of the ongoing bust:
The recent news on highly-levered Chinese property developers running into liquidity problems, and the latest data showing sharply falling land transactions and property sales on the back of regulatory tightening, exacerbate investors’ long-held concerns over China housing. In this note, we examine both the fundamental demand and credit supply aspects of the Chinese housing market.
On housing demand, we estimate demographic, replacement and investment demand separately. Demographic demand in turn is decomposed into total population, urbanization rate, and average household size. By our estimates, annual demographic demand may decline from 8mn units in the 2010s to only1.5mn by 2050 on falling population and fading support from urbanization, partly offset by slightly smaller average family size.
Given China’s still large stock of non-modern housing in urban areas, replacement demand is likely to remain significant for years to come. We expect annual demolitions to drop only gradually from 4.5mn units now to about 3.5mnby 2050. Investment demand is poised to shrink in the coming years as household expectations adjust to the new policy regime of “housing is for living in, not for speculation”. However, investment demand is unlikely to disappear entirely because of the high household saving rate and limited investment options. We expect a steady fall in investment demand from 3.5mn units pa now to 2mn in 2030 and less than 1mn by 2050.
Adding up the various pieces, we believe total demand for urban housing has peaked in China and may fall from 18mn pa in the 2010s to 6mn by 2050. Because many of the underlying drivers such as demographics tend to moves lowly, we expect a gradual fall in annual new demand: around -5% in 2022 and-3% pa thereafter.
However, policy-driven credit tightening could have a dramatic effect on property sales in the near term. Using the mortgage cap policy as an example and building on our banks analysts’ estimates, we calculate that property sales may drop as much as 20% next year if banks were to meet the mortgage cap target by end-2022. This is why we believe credit supply holds the key to China’s housing outlook in the near term while demand holds the key in the long run.
More here starring Michael Pettis. His take is that property investment will keep declining but will be offset by infrastructure spending.
I disagree. As property shakes out, local governments will be constrained on infrastructure as well. Nor is the sector big enough to offset property in terms of wider growth nor commodity inputs. It will be a mitigating not offsetting factor.
The end of Australia’s iron ore era is here.