It’s (Still) Not Going Well In China
It's not going well in China. Still. It's still not going well in China.
Beijing on Monday released activity data covering May and the story was familiar: The property market's mired in an intractable malaise and domestic demand's moribund. (Womp, womp.)
Although the pace of retail sales growth picked up for the first time in six months, 3.7% counts as tepid in China. For context, monthly retail sales prints averaged an 8.6% YoY gain from January of 2018 through December of 2020 (so, during th
If only there were some way that the ailing property sector (housing specific perhaps) in China… could aid the unafordability of the American housing market.
During globalization jobs went East. If we could just comprehensively get houses to come West… maybe everybody would feel better about each other?
deport people to China?
Apropos of nothing, but the images for your articles have always been great. Lately, they have been exceptional – well paired with your writing Walt, on many levels.
I’ve been thinking about how different the China housing crash is from Western crashes e.g. GFC.
Those with more knowledge, please correct or expand on the following.
In China, much of the “housing” is not actually housing. Apartments are delivered as uninhabitable concrete shells, never built-out or rented or owner-occupied, in largely vacant complexes.
They are basically just a financial asset that has no utility and produces no cash flow. In some or many cases, especially in secondary cities, they will never be occupied and can never produce cash flow, because China has hugely overbuilt “housing”, far beyond the population size and even farther beyond the population with money to pay rent. And China’s population is shrinking.
“ “How many vacant homes are there now? Each expert gives a very different number, with the most extreme believing the current number of vacant homes are enough for 3 billion people,” said He Keng, 81, a former deputy head of the statistics bureau. That estimate might be a bit much, but 1.4 billion people probably can’t fill them,” This quote is from 2023; naturally, Mr. Keng has not re-appeared to elaborate. https://www.asiafinancial.com/chinas-1-4bn-people-couldnt-fill-empty-homes-ex-official
So . . . a financial asset, without utility or cash flow, in gross over-supply, now falling out of favor with investors. Previously hyped and high priced, bought and built on margin.
How do you support the price of such an asset?
I question whether China, or any country, can. Especially with half measures.
Maybe China needs to find an alternative use for this “housing”. Vertical farming? Assisted living facilities for the West’s elderly? Let’s think out of the box, Xi.
China needs to get their consumers to spend. The best way might be to kill 2 birds with one stone. A retirement and health care safety net would unlock precautionary savings. China’s middle and lower classes need these desperately. If they had them, a lot of precautionary savings could be unleashed into consumer spending. Stranded housing assets need to be written off and sold.
I have studied housing since 1968, starting my doctoral classes and my subsequent dissertation on low-cost housing. The problem with it is that it, along with food, it is one of the two most important sectors of every economy, world wide. Shelter is also virtually monolithic, illiquid, and the most expensive of the assets individuals have to deal with. Developers who try to lead the economic cycle almost always over-build leaving a bunch of unoccupied dwellings that would already be sold if anyone could afford them. The average GDP in China is ~$12,500. Look at what’s in a house. A 1000 sq’ dwelling in China contains concrete, wood, copper, glass, etc. These items are commodities for which there is global demand so housing, while built with cheap labor, still costs much the same per sq’ in China as it does in more developed countries. The number of able buyers, while large, is dwarfed by those who need shelter but can’t afford what’s there. So now that the housing is overbuilt it won’t be going anywhere soon. We have a version of this problem in the US right now. Demand makes prices rise and so do higher interest rates, insurance costs and property taxes. Our problem won’t be going away any time soon either. When it’s not moving it shelter piles up. Always causes the same problem, every time, everywhere.