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China has long frustrated the hard-landing
watchers – or any-landing watchers, for that matter – who’ve diligently put
two and two together and rationally expected to be right. They see the supply
glut in housing, after years of malinvestment. They see that unoccupied homes
are considered a highly leveraged investment that speculators own like others
own stocks, whose prices soar forever, as if by state mandate, but that
regular people can’t afford to live in.
Hard-landing watchers know this can’t go
on forever. Given that housing adds 15% to China’s GDP, when this housing
bubble pops, the hard-landing watchers will finally be right.
Home-price inflation in China peaked 13
months ago. Since then, it has been a tough slog.
Earlier this month, the housing news from
China’s National Bureau of Statistics gave observers the willies once again.
New home prices in January had dropped in 69 of 70 cities by an average of
5.1% from prior year, the largest drop in the new data series going back to
2011, and beating the prior record, December’s year-over-year decline of
4.3%. It was the fifth month in a row of annual home price declines, and the
ninth month in a row of monthly declines, the longest series on record.
Even in prime cities like Beijing and
Shanghai, home prices dropped at an accelerating rate from December, 3.2% and
4.2% respectively.
For second-hand residential buildings,
house prices fell in 67 of 70 cities over the past 12 months, topped by
Mudanjiang, where they plunged nearly 14%.
True to form, the stimulus machinery has
been cranked up, with the People’s Bank of China cutting reserve requirements
for major banks in January, after cutting its interest rate in November. A
sign that it thinks the situation is getting urgent.
So how bad is this housing bust – if this
is what it turns out to be – compared to the housing bust in the US that was
one of the triggers in the Global Financial Crisis?
Thomson Reuters overlaid the home price
changes of the US housing bust with those of the Chinese housing bust, and found
this:
The US entered recession around two years
after house price inflation had peaked. After nine months of recession,
Lehman Brothers collapsed. As our chart illustrates, house price inflation in
China has slowed from its peak in January 2014 at least as rapidly as it did
in the US.
Note the crashing orange line on the left:
year-over-year home-price changes in China, out-crashing (declining at a
steeper rate than) the home-price changes in the US at the time….
The hard-landing watchers are now
wondering whether the Chinese stimulus machinery can actually accomplish
anything at all, given that a tsunami of global stimulus – from negative
interest rates to big bouts of QE – is already sloshing through the
globalized system. And look what it is accomplishing: Stocks and bonds are
soaring, commodities – a demand gauge – are crashing, and real economies are
languishing.
Besides, they argue, propping up the value
of unoccupied and often unfinished investment properties that most Chinese
can’t even afford to live in might look good on paper, but it won’t solve the
problem. And building even more of these units props up GDP nicely in the
short term, and therefore it’s still being done on a massive scale, but it
just makes the supply glut worse.
Sooner or later, the hard-landing watchers
expect to be right. They know how to add two and two together. And they’re
already smelling the sweet scent of being right this time, which, alas, they have smelled many times
before.
But it does make you wonder what the China
housing crash might trigger when it blooms into full maturity, considering
the US housing crash helped trigger of the Global Financial Crisis. It might
be a hard landing for more than just China. And ironically, it might occur
during, despite, or because of the greatest stimulus wave the world has ever
seen.
Stocks, of course, have been oblivious to
all this and have been on a tear, not only in China, but just about
everywhere except Greece. But what happens to highly valued stock markets
when they collide with a recession? They crash. Read… What
to Expect When This Stock Market Meets a Recession
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