“China Data, Part 1: Real Estate Downturn”

I’ve been hearing a lot about the real estate market downturn recently, and Chovanec has the best piece exploring all of the potential ramifications- this could be way bigger than it sounds:

The first signs of a downturn emerged in August, when China’s top 10 property developers reported unsold inventories totalling RMB 318 billion (US$ 50 billion), up 46% from the previous year. Highly leveraged, with debt to asset ratios approaching 65%, developers were coming under increasing pressure to liquidate those inventories for cash. The fire sale began in October, with several Shanghai developers slashing sale prices on new apartments by 25% or more. The discounts sparked angry (and sometimes violent) protests from investors who had previously bought the same units at full price, demanding refunds.

One location of particular interest is Ordos, the so-called “ghost city” in Inner Mongolia which I’ve been interviewed about so many times on TV. This summer, I began hearing stories of financial troubles — even a few suicides – among some of the less well-connected developers and speculators. Then, a few weeks ago, qq.com carried a dire report that average property prices there had suddenly plunged 70%, from RMB 10,000 per square meter to RMB 3,000, spawning a massive credit crisis.

The pressure on developers is unlikely to ease up anytime soon. According to property agency Centaline, unsold developer inventories reached new highs in September and October, levels that it calculates would take at least 22 months to clear in Beijing and 21 months in Shanghai, assuming normal sales volumes, even if no new projects were completed. Because more projects are underway, Centaline said it expects the country’s unsold housing inventory to keep growing and peak only in March of next year.

Caijing magazine paints a similar picture, estimating that the unsold housing piled up by developers in various cities across China would take roughly 12 months to sell at normal transaction volumes. It reports that, by the end of November, the total inventory of new unsold housing in eight major Chinese cities reached 45.95 million square meters, an increase of 38.4% over last year — and was still growing, by 3.1% over the previous month.

How investors in the secondary market will react to the collapse in primary market prices is the biggest question of all. As I’ve mentioned many times, many people in China buy multiple units of housing in order to hold them empty indefinitely, as a form of savings. They do this because they have few attractive alternatives and because they have faith that housing prices will go up.

Even without sparking a panic in the secondary market, a prolonged correction in the primary market is enough to pose a serious challenge to the broader Chinese economy. Remember what that unnamed realtor told WantChinaTimes.com, that “if the situation continues, many property projects will be postponed next year.” According to Shanghai Securities News, PBOC data on new bank accounts being opened by developers indicates that fewer projects are being initiated, and that property investment is slowing.

According to a central government study, local governments in China depend on land sales for approximately 40% of their revenues. The all-purpose answer, whenever doubts are raised about the ability of local governments to repay the loans or bonds that funded various stimulus projects, is that they can always sell more land. But when developers stop building, because they are too busy desperately trying to liquidate their existing inventories, they stop buying land.

According to Centaline, in November, 117 land parcel auctions in 35 major cities failed to find a buyer.

Suffice it to say — and I will have plenty more to say about this in follow-on posts — ever-rising land prices serve as one crucial underpinning for China’s entire financial system (the other, as we will see, is the nominal fiscal balance sheet of the central government).

The more you read about the real estate market and the overall Chinese economy, the less sense the entire system makes. That it has so many connections to local governments, who are themselves already sitting on massive piles of debt, just makes the entire thing more worrisome.

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Filed under economy, housing bubble

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