SCMP: Is China heading for stagnation as property slump goes Japan’s way in a deja vu crisis

[Hamartia Antidote]

Will China’s housing market go Japan’s way before the bubble bursts?

China’s real estate assets are facing the risk of a protracted pricing decline, if Japan’s experience in dealing with its own property bubble is anything to go by, analysts said.

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• The spectre of a real estate crisis blowing up to become a full economic crisis looms large in China, Natixis says
• Beijing is likely to intervene to stabilise the financial market to prevent and avoid a property bubble such as that in Japan, National University of Singapore professor says

China’s real estate assets are facing the risk of a protracted pricing decline, if Japan’s experience in dealing with its own property bubble and more than two decades of economic stagnation are anything to go by, analysts said.

The spectre of a real estate crisis blowing up to become a full economic crisis in the world’s second-largest economy looms large, as household consumption and investment are likely to take a severe blow and the fiscal resources of the government are also limited because the funding crunch in the property segment also impacts land sales, a major source of revenue, according to Natixis Corporate and Investment Banking.

“It does look a little bit worrisome,” said Alicia Garcia Herrero, chief Asia-Pacific economist with the French investment bank. “It’s well known that if you have very low prices, that feeds asset price inflation. It happened in Japan and it’s what can happen in China, given that China has been undergoing deflationary pressures for so many reasons. One is ageing, the other is the idea of bursting of the bubble. For me, it looks like asset prices will need to correct structurally, but especially real estate prices.”

In the 1980s, with the Japanese having excessive savings and an easy monetary policy, the population kept buying property. This led to a massive property bubble in the 1990s, as investors were speculating that property prices would keep rising. The ensuing bubble led to Japan’s “lost decade”, when its economic growth stagnated and deflation was a consistent feature of the economy, according to Natixis.

In China’s case, the high debt levels of private developers have been brought to the fore by Beijing’s “three red lines”, a set of requirements intended to curb risky borrowing. Unable to tap more loans, China Evergrande Group and other weaker developers have defaulted on their bond payments.

Chinese developers owed as much as U$5 trillion as of the second quarter of 2021, according to Japanese bank Nomura.

The property industry’s problem is likely to create a vicious cycle for the economy, as it accounts for slightly over a fifth of total fixed-asset investment. Fixed-asset investment plummeted to about 5 per cent in July.

Meanwhile, land sales, which also contribute about a fifth to government revenue, are likely to be impacted by the property slump as developers are unlikely to acquire parcels of land during a downturn and when funding is tight, according to Natixis.
Property sales are unlikely to provide relief to embattled developers, with rating agency Moody’s Investors Service predicting that demand will continue to decline in the next six to 12 months.

Last year, Cathie Wood, founder of investment management firm Ark Investment Management, warned that China’s asset bubble might burst the way Japan’s did in the 1990s, and urged Beijing to reduce excessive borrowing in the real estate sector.

But some analysts said there remain big differences. For instance, Beijing has much greater oversight of the housing market than Tokyo did because of administrative controls.

“The real estate market is strongly linked with upstream and downstream industries in China’s economy,” said Sing Tien Foo, professor and director of the Institute of Real Estate and Urban Studies at the National University of Singapore. “If the worsening real estate debt problem is unabated, it could create significant knock-on effects on the economy.”

The Chinese government is likely to intervene to stabilise the financial market to prevent and avoid a property bubble such as that in Japan, or a repeat of the US subprime crisis in 2007, Sing said.

To stave off instability in the financial sector, China is injecting 320 billion yuan (US$46.2 billion) into the banking system this year. Some of these funds are proceeds from local government infrastructure bond offerings that have been redirected towards banks.

Also, unlike in Japan, where the bubble was fed by speculation, the demand for housing in China “remains strong”, according to Martin Wong, director and head of research and consultancy in Greater China at Knight Frank in Greater China.

“We are not seeing a property bubble in China, as end-user demand remains strong,” Wong said. Any decline in demand “is mainly due to a short-term setback in buying confidence regarding the current debt issue and economic growth”.

China might also yet avoid going down Japan’s path to a property bubble and economic stagnation because Beijing has more tools to prevent a hard landing, said Kohei Iwahara, senior economist, Japan and Pacific at Natixis.

“Compared to Japan in the late 1990s, China has better established macroprudential policies, [and] better legal frameworks for bankruptcies and non-performing loans,” he said. “China also has tools to control supply of the real estate market. The essence is China has more resources in the hands of the state, which can be mobilised to affect demand and supply. Still, the moves are not free as they can still be costly to the society as a whole.”

 

[casual]

It's a year since China's property bubble burst, the worst has passed. It'll still take more time to for the housing market to digest the excesses of the bubble but looks like it'll be a soft landing.

 

[MH.Yang]

It's a year since China's property bubble burst, the worst has passed. It'll still take more time to for the housing market to digest the excesses of the bubble but looks like it'll be a soft landing.

There are many differences between Chinese real estate and Japanese real estate.

1. China's real estate foam was actively punctured by the Chinese government, and it is far from uncontrollable. Japan's foam burst suddenly.

2. The Chinese people still have a great demand for real estate. This is very important. Japan's demand is almost exhausted.

3. The ability of the Chinese government to control the market is far stronger than that of Japan.

This has led to the current price stagnation of China's real estate market, rather than a hard landing.

 

[S10]

There are many differences between Chinese real estate and Japanese real estate.

1. China's real estate foam was actively punctured by the Chinese government, and it is far from uncontrollable. Japan's foam burst suddenly.

2. The Chinese people still have a great demand for real estate. This is very important. Japan's demand is almost exhausted.

3. The ability of the Chinese government to control the market is far stronger than that of Japan.

This has led to the current price stagnation of China's real estate market, rather than a hard landing.

1. While it's somewhat more contained, it started with Evergrande and is still cascading. Chinese government has since loosened lending rules to increase liquidity, so I wouldn't call it planned.

2. China is nearing the end of its urbanization and will go into population decline in the next decade. The demand outside of Tier 1 cities are weak to non-existent.

3. While CCP does exert more control over the economy, it cannot generate demand when there is none.

China needs to shift away from the current model of housing, which benefits no one other than developers. Local government revenue is dependent on land sales to these developers, keeping prices inflated. At the same time, people's purchasing power are eroding by dumping all of their spare money in paying off mortgages, hurting the consumer economy.

 

[casual]

1. While it's somewhat more contained, it started with Evergrande and is still cascading. Chinese government has since loosened lending rules to increase liquidity, so I wouldn't call it planned.

2. China is nearing the end of its urbanization and will go into population decline in the next decade. The demand outside of Tier 1 cities are weak to non-existent.

3. While CCP does exert more control over the economy, it cannot generate demand when there is none.

China needs to shift away from the current model of housing, which benefits no one other than developers. Local government revenue is dependent on land sales to these developers, keeping prices inflated. At the same time, people's purchasing power are eroding by dumping all of their spare money in paying off mortgages, hurting the consumer economy.

agreed, though the risk of a collapse is over. the developers and banks that were too weak had already failed and the remining banks and developers have restructured their debts and work though the downturn.

this is a good time to introduce a new model of housing. I expect something will be announced in Oct

 

[MH.Yang]

1. While it's somewhat more contained, it started with Evergrande and is still cascading. Chinese government has since loosened lending rules to increase liquidity, so I wouldn't call it planned.

2. China is nearing the end of its urbanization and will go into population decline in the next decade. The demand outside of Tier 1 cities are weak to non-existent.

3. While CCP does exert more control over the economy, it cannot generate demand when there is none.

China needs to shift away from the current model of housing, which benefits no one other than developers. Local government revenue is dependent on land sales to these developers, keeping prices inflated. At the same time, people's purchasing power are eroding by dumping all of their spare money in paying off mortgages, hurting the consumer economy.

agreed, though the risk of a collapse is over. the developers and banks that were too weak had already failed and the remining banks and developers have restructured their debts and work though the downturn.

this is a good time to introduce a new model of housing. I expect something will be announced in Oct

According to my observation, the demand for housing is still great. Although the real estate turnover has declined, the demand for lease has not declined.

I also think we should introduce a new real estate development model. I think that as our population enters a declining cycle, we can give up the red line of 1.24 million square kilometers of arable land. Let part of the cultivated land was released into the real estate market.

In this way, we will have enough land to build enough villas, so as to find new real estate growth points.

 

[S10]

According to my observation, the demand for housing is still great. Although the real estate turnover has declined, the demand for lease has not declined.

I also think we should introduce a new real estate development model. I think that as our population enters a declining cycle, we can give up the red line of 1.24 million square kilometers of arable land. Let part of the cultivated land was released into the real estate market.

In this way, we will have enough land to build enough villas, so as to find new real estate growth points.

agreed, though the risk of a collapse is over. the developers and banks that were too weak had already failed and the remining banks and developers have restructured their debts and work though the downturn.

this is a good time to introduce a new model of housing. I expect something will be announced in Oct

I think housing should primarily by a public funded and nationally planned model, with a small market component for people wanting to purchase more luxurious properties. They should also tie eligibility of public housing units (i.e., must have children to qualify for 2-bedroom units) to fertility rate to encourage the population to have more children.

 

[MH.Yang]

I think housing should primarily by a public funded and nationally planned model, with a small market component for people wanting to purchase more luxurious properties. They should also tie eligibility of public housing units (i.e., must have children to qualify for 2-bedroom units) to fertility rate to encourage the population to have more children.

If the government is willing to loosen its control over the area of cultivated land, many people do not mind buying a villa in the suburbs or countryside. These villas far away from the city are not too expensive, and many people can afford them. This will be a new growth point of the real estate industry.

 

[S10]

If the government is willing to loosen its control over the area of cultivated land, many people do not mind buying a villa in the suburbs or countryside. These villas far away from the city are not too expensive, and many people can afford them. This will be a new growth point of the real estate industry.

That is not going to be anytime soon. China does not produce enough food to be completely self-sufficient, and there is a risk of Western blockade when Taiwan unification happens. They also need to start charging property taxes rather than sell land as a mean of local government revenue.

 

[casual]

If the government is willing to loosen its control over the area of cultivated land, many people do not mind buying a villa in the suburbs or countryside. These villas far away from the city are not too expensive, and many people can afford them. This will be a new growth point of the real estate industry.

that won't work for China. suburbanization is centered around cars. Chinese cities are not designed for the car culture. there simply is not enough space for the parking lots in chinese cities

 

[Ajamal]

The issue of rescission in my opinion is related to centralization. If you have big players controlling a big chunk of market and if that collapses, rescission will happen. If it is decentralized and there are too many players, collapse will not happen too soon. There will only be some manageable slow downs but collapse.

 

[MH.Yang]

That is not going to be anytime soon. China does not produce enough food to be completely self-sufficient, and there is a risk of Western blockade when Taiwan unification happens. They also need to start charging property taxes rather than sell land as a mean of local government revenue.

Let me explain this to you:

The property tax must be a local tax, so it must be the local government that determines whether to levy the property tax and the property tax rate. The local government is unwilling to levy property tax. The reason is that.

1, the impact of real estate tax on land price is devastating, which will severely hit local finance, rather than improve local finance.

2, The property tax will seriously affect domestic demand, which has a particularly big impact on local taxes.

3, Those deputies who can decide whether to levy property tax have house.

4, The property tax will seriously affect the amount of property of urban residents, thereby affecting social stability. Chinese people are very good tempered unless you ask them to pay.

5, The property tax will weaken the financial power of the central government. Since the implementation of the tax sharing system in 1994, China has formed a pattern of upward fiscal rights and downward business rights. Once the property tax is implemented, the financial rights of local governments will inevitably change, which will bring political risks.

6, The property tax may completely destroy the balance of real estate, leading to systemic economic risks. Once the house price collapses, it may lead to the large-scale necrosis of bank loans, thus causing financial crisis and economic depression.

 

[MH.Yang]

that won't work for China. suburbanization is centered around cars. Chinese cities are not designed for the car culture. there simply is not enough space for the parking lots in chinese cities

No. My suggestion is feasible.

Now the middle class in China has both houses and money. They don't mind buying another villa for vacation in the mountainous area with good air and scenery.

However, the current land policy prohibits urban residents from buying houses in rural areas, and also prohibits real estate developers from developing real estate in rural areas.

I personally hope to buy a high-quality villa in the countryside for my father and mother to spend their old age. They like planting flowers and vegetables and fresh air. Their wishes are hard to realize in the city.

In fact, roads in rural areas of China are very good. Every village has road links. If these roads are not enough, new infrastructure can be built. This will bring new points of economic growth.

 

[casual]

No. My suggestion is feasible.

Now the middle class in China has both houses and money. They don't mind buying another villa for vacation in the mountainous area with good air and scenery.

However, the current land policy prohibits urban residents from buying houses in rural areas, and also prohibits real estate developers from developing real estate in rural areas.

I personally hope to buy a high-quality villa in the countryside for my father and mother to spend their old age. They like planting flowers and vegetables and fresh air. Their wishes are hard to realize in the city.

In fact, roads in rural areas of China are very good. Every village has road links. If these roads are not enough, new infrastructure can be built. This will bring new points of economic growth.

won't work. China does not have enough space for the middle class to live in villas around cities. for the top .5% maybe, but definitely not middle class folks.

 

[MH.Yang]

won't work. China does not have enough space for the middle class to live in villas around cities. for the top .5% maybe, but definitely not middle class folks.

The red line of 1.24 million square kilometers of cultivated land is too high. We don't need to keep so much arable land.

Now our grain output is 217% of that of India. India has the same population, and they can even export food.

And we are entering a population decline cycle, and the demand for food will become less and less.

I think we can just keep 700000 square kilometers of arable land, and then seriously crack down on food waste. Export tax will be levied on non-staple food export enterprises.