China’s lending bubble sees Beijing home prices jump 63%

China lend v auto Apr17Greed and fear are the primary emotions driving China’s housing and auto markets today, as China’s lending bubble hits new heights.  For ordinary citizens, greed is the key driver:

   Average home prices in Beijing rose an eye-popping 63% between October 2015 – February 2017
   In Shanghai, one enterprising estate agent (realtor) has married 4 of his clients to enable them to buy a home

Mr Wang’s story highlights the bubble mentality that has taken over the market.  As the Daily Telegraph reports, 30-year old Mr Wang:

Married, and then quickly divorced 4 women to allow them to circumvent strict property laws which seek to cool prices in China’s booming cities, and pocketed more than £8000 ($10k) from each transaction. Once the paperwork is put through, Wang applies for a divorce and puts himself on the market again”.

This is just the latest phase of a market craze, as I noted in November, when one Shenzhen resident told the South China Morning Post:

“The only thing I know is that buying property will not turn out to be a loss. From several thousand yuan a square metre to more than 100,000 yuan. Did it ever fall? Nope.”  He and his wife got divorced in February, in order to buy a 4th apartment in Shanghai for 3.6m yuan (US$530k) on the basis that “ If we don’t buy this apartment, we’ll miss the chance to get rich.”

A collective delusion has swept China’s Tier 1 cities, just as happened in the USA during the sub-prime bubble. Amazingly, China’s property bubble is even larger than sub-prime. Unremarkable pieces of land in Shanghai are now being sold at $2000/sq foot ($21500/sq metre), nearly 3 times the average land price in Manhattan, New York.

It is understandable in some ways, as Chinese buyers have never known a downturn, as I noted in September:

“It is also easy to forget that housing was all state-owned until 1998, and still is in most rural areas.  Urban housing was built and allocated by the state – and there wasn’t even a word for “mortgage” in the Chinese language.  Not only have home-buyers never lived through a major house price collapse, they have also had few other places to invest their money”.

The scale is also much larger, as UBS have reported:

“Chinese banks’ outstanding loans extended to the property industry were between Rmb 54tn – Rmb 72 tn in 2016 ($7.8tn – $10.4tn).”

The chart above confirms this analysis.  In reality, the key driver for the bubble has been the growth in lending.  As with the US subprime bubble, this has not only impacted housing markets, but also auto sales:

   Q1 lending (Total Social Financing) averaged Rmb 2.4tn/month, 2.2x the Rmb 700bn/month level in Q1 2008
   Q1 auto sales averaged 1.9 million, 2.06x the 733k/month average in Q1 2008

China’s GDP was only $11.2tn last year, meaning that its property sector loans are more than 2/3rds of GDP.

China incomes Apr17The problem is that everyone loves a bubble while it lasts.  And so, as in the US during subprime, most analysts are keen to argue that “everything is fine, nothing to worry about here”.

   In the US, we were told at the peak of the bubble in 2005 by then Federal Reserve Chairman, Alan Greenspan, that house prices would never fall on a national basis
  Today, similar wishful thinking dominates, based on the myth that China has suddenly developed a vast middle class, with Western levels of incomes

The problem, of course, as the second chart shows, is that this is also not true.  Annual disposable income for city-dwellers averaged just $5061 last year, whilst in rural areas it averaged only $1861.  You really don’t buy many homes or cars with that level of income, unless a massive lending bubble is underway.

And this is why fear is the right emotion for everyone outside China.  Its lending bubble has driven the “recovery” in global growth since 2009 – pushing up values of everything from homes to oil prices.  So anyone who remembers the end of the US subprime bubble should be very scared about what could happen when – not if – China’s bubble bursts.

We can all hope that President Xi’s new policies will enable a “soft landing” to occur, and gently unwind the stimulus policies put in place by Populist Premier Li and his predecessor Premier Wen?  But hope is not a strategy.  And as the Guardian reported last month:

“Goldman Sachs is said to estimate the chance of a financial crisis in China this year at 25%, and in 2018 at 50%.

 

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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