Goldman: Chinese property is turning Japanese

Is Chinese property turning Japanese? The answer is “yes”. But there will be differences. Goldman with the note:

The Chinese property market experienced a dramatic boom during the 2010s, similar to the housing boom in Japan in the second half of 1980s. In Japan, land prices halved and economic growth ground to a halt during the three decades after the 1991 peak. Given the recent deleveraging policies and significant slowdown in the Chinese property market, we compare the two countries 30 years apart and draw lessons from Japan’s experience for China.

We highlight two major similarities between China and Japan. The first is demographics. Demographic “bonus” turned into demographic “onus” in the early 1990s for Japan, and the working-age to non-working age population ratio similarly peaked in China around 2010. Slower population growth not only means less demand for residential property but also could exacerbate the downturn after significant negative shocks. Second, a series of tightening policies were implemented in the property market around 1990 in Japan and over the past year in China. Multiple policies reinforce each other, amply the effects on the market, and can generate unintended overtightening.

We also highlight two major differences between China and Japan. First, a massive equity market collapse in Japan that started in 1989 eroded bank capital on the eve of the property market downturn. This is not the case for China today. Second, after monetary policy was kept too easy for too long to support the economy amid the sharp JPY appreciation following the Plaza Accord in 1985, the BOJ hiked interest rates too rapidly and substantially, which hurt aggregate demand significantly. This historical episode also does not apply to China.

That said, many nuances exist in the China and Japan comparison. Along dimensions such as residential investment share of GDP, land sales share of local government total revenue, and urban housing vacancy rate, a sharp property market correction may be more damaging to the economy in China than in Japan. On the other hand, along dimensions such as the degree of urbanization and bank capital adequacy, the opposite may be true. Importantly, Chinese policymakers can learn from Japan’s experience in a bid to avoid similar policy missteps, a luxury that Japanese policymakers did not have. In this regard, recent policies to stabilize the property market are encouraging.

Most of those mitigating factors are useless. Chinese urbanisation is at 64% not 61% and as a continental economy, it’s not going to reach Japan’s compressed 92%. Nor did Japan ever have a vast empty apartment inventory owned by households.

Stocks are not widely owned so that helps. But, really, the only major mitigating factor is Chinese banks can be forced to lend. However, given that only make the problems worse, there are obvious limits to that as well.

Chinese property is turning Japanese. It is only a question of how fast.

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