China:housing Starts Down 25% Yoy

[Sancho Panza]

NYT 13/5/14

'HONG KONG — After almost two decades of nearly unceasing increases in real estate prices and construction across China, one of the world’s longest-running bull markets finally seems to be stalling, with broad consequences for China’s economy and possibly its politics as well.

Housing starts plummeted 25 percent last month from a year ago, the Chinese government announced on Tuesday — a severe blow for a country in which residential real estate construction has come to account for one-ninth of all economic output.

Prices have begun falling for new apartments and old ones, and the volume of deals is drying up. The square footage of housing transactions slumped nearly 16 percent last month, as sellers were reluctant to accept the discounts that buyers increasingly demanded.

China’s real estate market correction — some economists are even calling it the popping of a bubble — is partly the result of a deliberate decision by the country’s leaders in Beijing.

The Federal Reserve and other regulators in the United States did not try to pop the American housing bubble in the decade leading up to the market’s slump in 2008.

But the Chinese leadership has been increasingly concerned over the past several years that housing prices were rising to unaffordable levels and that the economy was becoming overly dependent on investment, and it has taken action.

The result has been a series of policies that includes punitive interest rates for mortgages on second homes, a ban on the purchase of third homes and, more recently, deliberate action by the central bank to keep short-term interest rates well above the rate of inflation. Zhou Xiaochuan, the governor of the central bank, the People’s Bank of China, reaffirmed tight credit policies on Saturday, saying that he did not think the economy was in sufficient trouble to justify monetary policy stimulus.

In a country where real estate sales offices have become ubiquitous and tower cranes are jokingly described as the national bird, the question is how much further the real estate market will slow, and whether its troubles will spill into other sectors of the economy, notably the banking system.

In addition to delaying new projects, developers have sharply reduced the speed at which they complete existing projects, furloughing workers and shipping minimal steel to building sites. Economic data released on Tuesday also included a deceleration in industrial production, with growth in steel and cement output slowing to a crawl. Retail sales also grew more slowly than expected in April, with the furniture market stalling as fewer families moved into new homes.

Su Hua, a real estate broker in Shenzhen, had his highest commissions ever last year, as a speculative frenzy prompted families all over China to buy and sell apartments at a brisk pace. But he sat in a deserted office late last week with several silent phones on his desk.

His business has halved so far this year. More worrisome for him is that the drying-up of the market shows no sign of ending.

According to Centaline, one of China’s largest real estate brokerage firms, transactions fell by half in Beijing and Shanghai from a year ago over the May 1 holiday weekend. The weekend is traditionally one of the two biggest real estate buying times of the year, along with a weeklong national holiday at the start of October.

“There is not much else I know how to do,” Mr. Su said. “Maybe I will consider selling insurance on the side, if business continues to slow.”

Chinese banking executives and economists say that a severe housing downturn would most likely cause a considerable increase in nonperforming loans at the country’s banks. But they make several arguments for why even a fairly steep slump in housing might not lead to bank failures or emergency bailouts of the sort seen in the United States when the American housing market slumped in 2008 and 2009.

The top reason cited is that even a fairly steep drop in the housing market would still leave the prices of most homes higher than the balance due on the mortgages on those homes. So almost nobody expects a big wave of foreclosures.

The bulk of the homes in China were purchased more than five years ago, and real estate prices have about doubled in the past five years. Mortgage down payments range from 20 percent to 40 percent and are often higher, giving banks a larger cushion against losses.

Chinese families also have one of the world’s highest saving rates — nearly half of income for urban households, compared with almost zero for American households.

A bigger worry, and harder for banking regulators to measure, lies in the extent to which companies in other sectors have borrowed money from banks and trusts that they were supposed to invest in equipment purchases and other business activities, but have secretly speculated in real estate instead.

Extensive anecdotal evidence suggests that such speculative activity by companies has been very widespread. But the losses may only become visible if there is a deep, sustained drop in real estate prices.

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The office and commercial real estate sectors are tiny in China compared with residential real estate and have shown wide variation among cities. Good locations and high-quality buildings in major cities like Beijing and Shanghai still attract many potential buyers, but single floors in office buildings in many second- or third-tier cities have fallen out of favor, said James Shepherd, the executive director of greater China research at Cushman & Wakefield, the global commercial real estate brokerage firm.

Government and private-sector statistics for real estate prices are inconsistent and hard to compare. But discounts of 10 percent to 20 percent from a year ago are increasingly common for homes sold between individuals, and increasingly for new units sold by developers as well, real estate executives said.

A bigger question lies in the potential for street protests and other turbulence if real estate prices keep falling. A national survey released in March by the Southwestern University of Finance and Economics in Chengdu, China, found that households across the country have 66 percent of their assets in their homes, a figure that rises to 84 percent in Beijing. The comparable figure for the United States, where stocks and bonds are more popular, is 41 percent.

The chairman of a large developer with operations across China said that offering price discounts for the remaining units in half-sold projects was extremely difficult, because earlier buyers could stage street protests demanding refunds equal to the discounts.

The potential for protests, and not banking sector exposure to real estate, “is what concerns me,” said the developer, who insisted on anonymity because of the sensitivity of the issue.'

Reuters 13/3/14

'But the sources said one area of concern may be bank lending to clients who used commodity imports such as steel or copper as collateral.'

Let's hope the price of steel holds up.

[wonderpup]

The chairman of a large developer with operations across China said that offering price discounts for the remaining units in half-sold projects was extremely difficult, because earlier buyers could stage street protests demanding refunds equal to the discounts.

I guess if you were born and raised in an ever expanding bubble that would be your normality- so if that bubble starts to contract it has to be somebody's fault-someone, somewhere, has ripped you off.

The Chinese don't know capitalism like we do- they haven't met it's darker side-yet. So far it's all been sunshine and rainbows.

[interestrateripoff]

How will they make up the GDP figures now?

The first recession in China is going to be interesting.

[Sancho Panza]

http://www.telegraph.co.uk/finance/china-business/10828912/China-reverts-to-credit-as-property-slump-threatens-to-drag-down-economy.html

Ambrose on the case this morning.

'China's authorities are becoming increasingly nervous as the country’s property market flirts with full-blown bust, threatening to set off a sharp economic slowdown and a worrying erosion of tax revenues.

New housing starts fell by 15pc in April from a year earlier, with effects rippling through the steel and cement industries. The growth of industrial production slipped yet again to 8.7pc and has been almost flat in recent months. Land sales fell by 20pc, eating into government income. The Chinese state depends on land sales and property taxes to fund 39pc of total revenues.

Wei Yao, from Société Générale, said the property sector makes up 20pc of China’s economy directly, but the broader nexus is much larger. Financial links includes $2.5 trillion of bank mortgages and direct lending to developers; a further $1 trillion of shadow bank credit to builders; $2.3 trillion of corporate and local government borrowing “collateralised” on real estate or revenues from land use.

“The aggregate exposure of China’s financial system to the property market is as much as 80pc of GDP. This is not a sector that can go wrong if China wants to avoid a hard landing,” she said. The risk is that several cities will face a controlled crash along the lines of Wenzhou, where prices have been falling non-stop for two years and have dropped 20pc.'