The Evergrande Chinese property developer debacle had unleashed a bone-crushing shockwave across China’s economy, which takes place as Beijing continues to maintain its deleveraging stance amid Xi’s “shared prosperity” drive. It has meant far less created credit is available to mask the current weakness in the economy. So how is the Chinese property market doing overall?
The Chinese property market is the largest asset class in the world, according to Goldman Sachs. It is near $62 trillion as compared to just $34 trillion in the US. See this in the chart below and learn more here.
Home prices are likely to grow in major markets across the globe in the coming year, according to property analysts. But there may be one notable exception: mainland China.
In its latest Global Housing and Mortgage Outlook, Fitch Ratings predicts a decline of 3% to 5% in China’s home prices in both 2022 and 2023, a sharp reversal of the growth momentum seen in previous years. The credit rating company predicts more developers defaulting on their loans and increased government intervention in the market. Home prices were estimated to have grown 2.5% this year.
The unsold housing stock in China’s 100 biggest cities rose to the highest in five years in November, according to a private-sector survey, as weak demand in smaller centers added to headaches for the country’s property market. Inventories continue to expand 2.1% at the end of last month from a year earlier. The increase in November also marked the 36th consecutive month of on-year gains.
The Chinese housing market has continued a slowdown that it started by the middle of 2019 during the coronavirus crisis. In July 2021, the year-over-year increase in the country’s 70 major housing markets was only 4.6% for new residential buildings, down from double digits from January to June 2019. See this in the chart above and learn more here.
What do these charts mean for China?
The Gross Domestic Product per capita in China was last recorded at $10,430.73 US dollars in 2020. The Gross Domestic Product per capita in the United States was last recorded at 58,510.24 US dollars in 2020. Do these numbers make sense relative to the sizes of the two countries’ property markets?
Let’s do some quick ratio analysis – assume the US property market is in balance relative to its income (i.e., ability to afford) and the US property market size.
- US property market ($34 trillion) : Per capita GDP ($58,500) = China property market ($62 trillion) : Required Per capita GDP ($106,676). The required per capita GDP in China is only about 10% of what it needs to be.
- US property market ($34 trillion) : Per capita GDP ($58,500) = Required China property market ($6.1 trillion) : Per capita GDP ($10,500). The required size of the Chinese property market is 10 times the size of what it should be.
One may argue that this is an unfair analysis – for example, it does not take into account actual property credit being used or that Chinese culture uses houses as a “piggy bank” savings account, to name a few. However, regardless of these other factors, the Chinese property market is far from sanity relative to other property markets in the developed world. It is a house of cards.
It is no wonder we are hearing stories like the Chinese Evergrande property debacle – there will be many more in the future. It also may explain the dire financial position China is in regardless of the many positives you may have heard. Trade storms are also on the horizon – but another topic.
One must consider how this will affect the Chinese leadership and the potential internal and external problems they may have. Though actual reports are often screened by Chinese media, there is anecdotal evidence the Chinese people are starting to react – see here and here. This may also provide insights on why they may move geopolitically in order to quell internal financial problems that are set to occur.
A developing story that is yet to be told.
See more #chartoftheday posts.
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