China's Housing Collapse is Still Getting Worse

Summary

The Chinese property sector is in crisis, with housing starts down 60% and house prices falling for 12 months straight, affecting the economy significantly. Urbanization and a cultural emphasis on home ownership led to a speculative bubble, likened to a Ponzi scheme, which the 'three red lines' policy attempted to curb, causing a sector-wide funding crisis. The Evergrand Group's bankruptcy highlighted this issue, leading to reduced spending, business downturns, and a broader economic impact. Despite government measures to stimulate the market, investor confidence remains low, and the economy faces deflationary pressures. There are, however, signs of slight recovery with recent data indicating a return to slight inflation and increased consumer spending.

Takeaways

• 🏗️ China's property sector is in crisis, with housing starts falling by over 60% and house prices dropping for 12 consecutive months.
• 💰 Real estate is a significant part of Chinese citizens' wealth, with 90% of households owning homes and 70% of household wealth tied up in property.
• 📉 The decline in the property market has led to reduced spending by citizens, negatively impacting businesses and stock market performance.
• 🌐 Urbanization in China has driven demand for residential homes, which has been both a social goal and an investment product for Chinese families.
• 💡 The pre-sale model in China's property development resembles a Ponzi scheme, where new investors' funds are used to pay off previous investors and fund ongoing projects.
• 🚫 The 'Three Red Lines' policy by the CCP has restricted developers' ability to take on more debt, causing a sector-wide crisis in finding new funds.
• 📉 The Evergrande Group's bankruptcy has shaken investor confidence and led to a slowdown in China's real estate market.
• 📉 Chinese property investments have seen the most significant year-over-year decline on record, aside from the early days of the COVID pandemic.
• 📉 New and secondhand home prices have dropped sharply, with the steepest decline in secondhand housing prices since 2011.
• 🛑 The Chinese government has taken measures to assist the property sector, including allowing local governments to buy homes and cutting mortgage rates, but investor response has been weak.
• 🌟 There are some positive signs of slight inflation and increased consumer spending, as well as growth in exports, indicating potential for economic recovery.

Q & A

What is the current situation of China's property sector?

China's property sector is in crisis, with housing starts falling by more than 60% compared to pre-pandemic levels and house prices experiencing a significant drop.

How does the decline in the property sector affect Chinese citizens?

Since approximately 90% of Chinese households own their own homes and around 70% of household wealth is tied up in property, falling house prices directly impact their wealth and spending habits.

What is the Ponzi scheme-like aspect of China's property development?

Developers sell pre-sale homes where buyers pay a deposit and start mortgages before construction is complete. The revenue from these pre-sales is often used to fund previous projects, creating a cycle similar to a Ponzi scheme.

What was the 'three red lines' rule introduced by the CCP and its impact?

The 'three red lines' rule set financial thresholds for real estate developers to take on more debt, causing a sector-wide crisis as many developers were in breach, leading to difficulties in finding new funds and a slowdown in the real estate market.

How has the property crisis affected the broader Chinese economy?

The property crisis has led to reduced spending by citizens, impacting businesses and causing a decline in stock prices, layoffs, and a negative spiral in the economy.

What measures has the Chinese government taken to address the property sector crisis?

The government has allowed local authorities to buy homes for affordable housing, cut mortgage loan interest rates, and reduced down payment ratios for home buyers to stimulate demand.

What has been the response of investors to the stimulus measures taken by the Chinese government?

Despite the stimulus measures, investors have not yet responded positively, as evidenced by the continued weak funding for developers and the shrinkage of financing for developers.

How has China's approach to economic stimulus during the pandemic differed from that of the US?

While the US printed trillions of dollars in stimulus, China chose not to implement large-scale stimulus, leading to different economic outcomes, with the US experiencing inflation and China facing deflation.

What are some positive signs in the Chinese economy despite the ongoing challenges?

There are signs of slight inflation and increased consumer spending, with retail sales beating expectations and exports growing, indicating some recovery potential.

What are the expectations for future economic measures by the Chinese government?

Economists expect further interest rate reductions, relaxation of housing regulations, and possibly increased borrowing for infrastructure. However, there is a call for measures that put income directly into people's pockets to stimulate consumption.