Inquiring minds are reading an excellent report China Real Estate Unravels by Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management in Beijing, China.
The report confirms many of the things I said would happen in regards to the Chinese real estate bubble and GDP.
Here are a few items of note.
Developers, burdened by 70% leverage ratios and loans threatening to come due, rushed to complete projects already in their pipeline, to put those units onto the market and raise cash.
That rush to complete inflated real estate investments, allegedly up 23.5% in the first quarter. Other statistics from the report tell the real story.
- Year-on-year sales in Q1, for all real estate, was down 14.6%.
- Residential property sales were down 17.5%
- Office sales were down -10.2%
- Sales in January-February were a disaster, falling 20.9% overall, compared to the first two months of 2011, -24.7% for residential.
- Total amount of floor space “for sale” was up 35.5%, compared to the same date last year
- Floor space of residential units “for sale” grew 47.4%.
- At the end of 2011, total floor space “under construction” was roughly 4.6 times the floor space sold
- A year and a half worth of excess inventory is hidden somewhere in the pipeline
- New starts in April fell 14.6% year-on-year and 27.0% month-on-month, for property as a whole
- Housing starts fell -14.4% year-on-year and -23.4% month-on-month
- Office starts fell -21.0% year-on-year in April, and -45.1% compared to March
- Retail property starts fell -18.7% year-on-year, and -36.8% compared to March
- Land sale revenues in April (RMB 27 billion) were down -54.7% compared to April last year
- Foreign funding for property development was down -91.4% in March and -80.8% in April, compared to the same months last year.
Clearly a crash is underway. The above stats also show the soft-landing thesis is written on toilet paper.
I like the analysis by Chovanec on GDP implications and the highly-overrated “soft landing” theory.
The “resilient” growth in real estate investment that seemed to promise a “soft landing” is not very resilient at all. It’s more like the last gasp of a market that’s running out of steam. Once the surge in completions plays out, the declining number of new starts will become the pipeline, and growth in property investment will flatten or go negative.
Property investment accounts for roughly a quarter of gross Fixed Asset Investment (FAI), and net FAI accounts for over half of China’s GDP growth. As I noted in January, in a back-of-the-envelope thought exercise, if property investment plateaus (growth falls to zero), it could shave as much as 2.6 percentage points off of real GDP growth. If it fell 10% (in real, not nominal terms) it could bring GDP growth down to 5.3%.
At the time I first saw this dynamic in the data, when the Q1 numbers came out, I figured it would take several months to begin playing out. But the April numbers suggest it is already happening.
Chovanec notes if real estate investment drops by 10%, GDP will come in at 5.3%. What if real estate investment falls by 20% or 25%? Moreover, why shouldn’t it?
Nails in the Hard Landing Coffin?
One of the sillier stories making the rounds earlier last month was China currency move nails hard landing risk coffin
I responded at the time with …
The longer China puts off rebalancing its economy, the bigger the crash later on. Moreover, widening the band on its currency is a needed part of that rebalancing, and does not preclude in any way a huge slowdown in growth.
The structural imbalances in China are large and for now, still growing. However, huge cracks have appeared in real estate, and changes are coming up with a regime change. Finally, peak oil alone makes many of the growth estimates we have seen for China outright impossible.
The real estate crash has arrived. The GDP crash will follow. For details, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?
Mike “Mish” Shedlock
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