Or, call me at: It’s a given that what goes up must come down, and as they’re learning over in China, when it comes to real estate “it” often comes down a heck of a lot faster than it went up. Now that the bust has hit, real estate prices are collapsing in many major Chinese real estate markets. With so many lenders leveraged up on massively overvalued apartments and condos, could a major Chinese financial crisis be imminent?
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From The Telegraph:It is hard to obtain good data in China, but something is wrong when the country’s Homelink property website can report that new home prices in Beijing fell 35pc in November from the month before. If this is remotely true, the calibrated soft-landing intended by Chinese authorities has gone badly wrong and risks spinning out of control.
Imagine if you had just closed on a new home and your builder decided to discount the price by 25% the following month to clear his inventory. Would you be angry? New home buyers in China are practically rioting over this kind of stuff:
A fire-sale is under way in coastal cities, with Shanghai developers slashing prices 25pc in November – much to the fury of earlier buyers, who expect refunds. This is spreading. Property sales have fallen 70pc in the inland city of Changsa. Prices have reportedly dropped 70pc in the “ghost city” of Ordos in Inner Mongolia. China Real Estate Index reports that prices dropped by just 0.3pc in the top 100 cities last month, but this looks like a lagging indicator.
As with the subprime mess here in the United States, which triggered the collapse of the biggest real estate bubble in American history, the collapse of the bubble in China threatens the country’s banking system with a major financial crisis. The Telegraph article continues:
Fitch Ratings said China is hooked on credit, but deriving ever less punch from each dose. An extra dollar in loans increased GDP by $0.77 in 2007. It is $0.44 in 2011. “The reality is that China’s economy today requires significantly more financing to achieve the same level of growth as in the past,” said China analyst Charlene Chu.
Ms Chu warned that there had been a “massive build-up in leverage” and fears a “fundamental, structural erosion” in the banking system that differs from past downturns. “For the first time, a large number of Chinese banks are beginning to face cash pressures. The forthcoming wave of asset quality issues has the potential to become uglier than in previous episodes”.
China seems to have a thing for building the biggest and baddest of everything – including real estate bubbles. Home prices in Beijing reached an astronomical and unsustainable 22 times income levels in 2010. By comparison, that would be like the average home in Orange County, California costing around $1.4 to $1.5 million (OC median prices peaked at around $650,000 in 2007).
China has been pumping money into new apartments, schools, office buildings, and infrastructure regardless of the fact that there’s no demand for them. There are entire cities gleaming and new with hardly a soul living in them scattered across China. Check out my blog posts about China’s “ghost cities” here and here.
It’s a simple fact that when prices and inventory reach levels where buyers dry up, prices need to correct to levels where the market can clear. Even governments with lots of cash (as China has) can’t prevent the laws of economics from reasserting themselves forever.
It should be interesting to see how this plays out over there. China has been hailed by many as an economic miracle, which it has been in many ways, but much of the miracle is built on a very large and shaky mountain of debt.
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