Unprecedented Housing Bailout Revealed, As China Property Sales Drop For First Time In 30 Months

Back in March, we explained why the "fate of the world economy is in the hands of China"s housing bubble." The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth will keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting "wealth effect", in China it has always been about housing: three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US with the remainder invested financial assets.

Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, "smooth landing" process. 

The other reason why China is so eager to keep its housing sector inflated - and risk bursting bubbles - is that as shown in the chart below, in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice the total local disposable income of RMB12.9 trillion. For any Fed readers out there, that"s how you create a wealth effect, fake as it may be. 

Unfortunately for China, whose record credit creation in 2017, and certainly in the months leading up to the 19th Chinese Communist Party Congress which started last week, has been the primary catalyst for the "global coordinated growth", the good times are now again over, and according to the latest real estate data released last week, property sales in China dropped for the first time since March 2015, or more than two-and-half years, in September and housing starts slowed sharply reinforcing concerns that robust growth in the world’s second-largest economy is starting to cool.

Property sales by floor area fell 1.5% in September from a year earlier, compared with a 4.3% increase in August and a 34% jump in September 2016, according to Reuters calculations based on official data released on Thursday. That marked the first annual decline since the start of 2015. Separately, new construction starts by floor area, a volatile but telling indicator of developers’ confidence, rose just 1.4% in September on-year, slowing from a 5.3% increase in August, according to Reuters calculations.

“The negative September sale number shows that, unequivocally, the property boom has peaked,” Rosealea Yao, a property analyst at Gavekal Dragonomics told Reuters. “We have seen some big rebounds at the end of the first and second quarter, but given how fast the sale numbers are declining, we expect no big rebound this time.”

Echoing our concerns above, Reuters writes that "real estate, which directly affects 40 other business sectors in China, is a crucial driver for the economy but also poses a major risk as Beijing looks to tame soaring home prices without triggering a crash or a sharp drop in construction activity.

The easing in property activity appeared to drag on broader growth in the third quarter, and as many economists predicted China’s GDP rose 6.8% in the third quarter from a year earlier, down from 6.9% in the second quarter. And while property investment did rise 9.2% in September, picking up pace from an expansion of 7.8 percent in August, analysts warned such investment usually lags sales trends by up to six months.

Still, as discussed here previously, while home prices have sharply softened in China"s biggest, Tier-1, cities in recent months in response to a flurry of government cooling measures, property bubbles are still a threat in other parts of the country.

A flurry of small cities have had to unveil fresh property curbs in recent weeks after speculators turned their attention to less-restricted cities that have massive overhangs of unsold houses.

Moreover, in addition to many buyers purchasing second houses on credit as Deutsche Bank pointed out last month, high prices are forcing many home buyers to take on more debt, weighing on future household consumption and leaving banks more exposed to any property downturn even as Beijing looks to rein in financial system risks. Household loans, mostly mortgages, rose to 734.9 billion yuan ($110.80 billion) in September from 663.5 billion yuan in August, despite rising mortgage rates, according to Reuters calculations. Short-term loans also soared in the third quarter, suggesting speculators may be trying to circumvent property cooling measures, economists said.

What is most concerning, however, is that the recent sharp decline takes place even as policymakers have made stabilizing the overheated property market a top priority ahead of a critical Communist Party Congress this week, reiterating the need to avoid dramatic price swings which they fear could threaten the financial system and harm social stability.

Adn while a downward inflection point in China"s housing market - which accounts for a third of China’s economic growth - is bad, what follows is far worse.

According to a fascinating new WSJ report, China"s housing downturn is likely far worse than meets the eye, as under Beijing’s direction more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China’s Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020. The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market,

As the WSJ notes, this latest backdoor bailout "It is a sharp illustration of China’s economy under President Xi Jinping and the economic challenges he will face as he renews his 5-year term at a twice-a-decade Communist Party Congress that opens on Wednesday."

Rosealea Yao from Gavekal Dragonomics, who was also quoted above, wrote that “the government’s creativity in coming up with new ways of supporting the housing market is impressive—but it’s also an indication that it still depends on housing for growth."

While traditionally, China’s government used to build homes for families who lost theirs to development or decay, last year, local governments, from the northeast rust belt to the city of Bengbu with 3.7 million amid the croplands of central Anhui province, spent more than $100 billion to buy housing from developers or subsidize purchases, according to Gavekal Dragonomics.

In other words, the reason why China no longer has ghost cities is because the government is buying them in just as concerning, "ghostly" transcations.

The underlying structure is yet another typically-Chinese ponzi scheme:

Underpinning the strategy is a cycle of debt. Cities borrow from state banks for purchases and subsidies, then sell more land to developers to repay the loans. As developers build more housing, they, too, accrue more debt, setting up the state to bail them out again. The burden on the state rises, as does the risk of collapse.

What is astounring, is that while the government has tried other ways of filling apartments, such as offering cash subsidies to encourage rural migrants to buy in urban areas, the program is the first large-scale case of the government becoming a home buyer itself. In May, Lu Kehua, China’s deputy housing minister, said the program has “played a positive role in steady economic growth,” and called for a push to clear housing inventory as early as possible, according to an article by the official Xinhua News Agency.

Well, of course, it"s played a "positive role" - when the government itself is buying half the units it bought (see chart above), what can possibly go wrong? Well, pretty much everything if the housing market is once again headed lower and with the explicit backing and funding of the Chinese government.

Some more fascinating details on how China fooled the world into believing back in 2014 that its recently burst housing bubble had "smoothly landed" and was again recovering:

Three years ago, Bengbu’s housing prices were falling. Housing inventory in 2014 would have taken almost five years to fill at the pace of sales at the time, said Shanghai-based research firm E-House China R&D Institute. Around the same time, the Bengbu government began to gobble up homes, and it has continued to do so. The city said it bought nearly 6,000 apartments from developers last year.

 

Housing stock in Bengbu was down to four months in September, a city official overseeing the government program said in September. Home prices had increased by 15% in August from a year earlier. That exceeded the 8.2% growth across a benchmark of 70 cities compiled by the national statistics agency.

 

Beijing and Shanghai residents are used to such price surges, but it is unusual in a smaller Chinese city lacking any particular tourism or job-market appeal.

Naturally, China would rather not have details of its latest bailout program spread too far:

Bengbu officials are wary about publicizing its hand in the market for fear of driving up prices and speculative buying. “We don’t mention it as much now as in the past two years,” the city official in charge of the program said. “Prices have been fluctuating a lot, and it’s a little bit out of control.”

Since the launch of the program, which is an explicit subsidy to Chinese real-estate developers who are directly selling to the government, things have predictably normalized. In fact, the outcome has been a little too frothy:

In 2015, groups of families on government-organized apartment tours started showing up, said Ding Qian, a planner at the developer, Bengbu Mingyuan Real Estate Development. By October 2016, the developer had sold 20 blocks of finished apartments, about 10% of them paid for with government funds, Ms. Ding said.

 

“We have run out of apartments to sell,” she said. The developer has sped up construction of 42 new blocks, about 4,000 apartments, and has raised prices by 40%.

All thanks to the government, which is lending to local governments to avoid the impression it is directly involved in bailing out China"s "wealth effect":

The Bengbu official in charge of the program declined to disclose details about the city’s apartment purchases, but said the city had borrowed 10 billion yuan ($1.5 billion) of the 19 billion yuan of available credit extended by China Development Bank for housing purchases and subsidies.

 

Local governments in 2016 borrowed 972.5 billion yuan from the bank, the government’s main housing lender, nine times the level three years earlier, according to E-House China R&D Institute, which compiled data from official bank and government websites. More than half of last year’s loans went to purchases or subsidized buying, according to the official Xinhua News Agency. The rest of the loans funded housing projects built by the government.

What is most firghtening, is that despite the decline in property sales, the government’s role in the housing market continues to grow according to the WSJ, and here is a stunning statistic: Of all the residential floor space sold in China last year, 18% was purchased by government entities or with state subsidies, E-House China determined from official government data. The share could reach 24% this year, the firm said.

To paraphrase: Beijing is now the (covert) marginal buyer of a quarter of all Chinese real estate. That, in itself, is a mindblowing statistic. What is scarier, is that despite this implicit backstop, property sales are once again declining after 30 months of increases. One can only imagine the epic crash that would ensure at this moment, if - for some reason - the government bid were to be pulled, and just how spectacular the ensuing global depression would be as the rug is pulled from below the middle class of the world"s fastest growing economy.

Stevenson-Yang Warns "China Is About To Hit A Wall"

Authored by Christof Gisiger via Finanz Und Wirtschaft,

Anne Stevenson-Yang, co-founder and research director at J Capital, warns that the monster bubble in the Chinese housing market is ripe to pop and that the Chinese currency will crash.

It’s been exactly two years now since turmoil in China’s currency markets threw investors around the globe into panic. After the shock in late August of 2015, another tantrum followed in early 2016. Since then concerns about China have diminished. The consensus seems to be that Beijing once again has regained control. Nonetheless, Anne Stevenson-Yang remains skeptical. The co-founder of the influential research firm J Capital warns that the speculation in the Chinese real estate market is getting evermore excessive. “There is little comfort that the economy can go on for much longer without some catastrophic adjustment”, says the American who’s one of the most distinguished experts on China. She expects that China’s currency will devalue significantly and explains why the Chinese government is cracking down on HNA and other Chinese companies that have been on an overseas buying spree.

Ms. Stevenson-Yang, many investors don’t seem to care much about China anymore. How is the situation inside the Middle Kingdom two years after the currency shock of August 2015?

Everyone in China – from the government at every level to the people who work in banks, construction companies and real estate companies – is one hundred percent focused on how to push growth with more investment. That’s all people think about. Everybody is maniacally focused on the questions if investments will continue and if investments can continue to drive growth.

Why are investments so important to China?

The way investments drive growth for the most part this through housing prices. So for the average middle-class or upper-class person in China the focus is all on how much will property prices increase this year.  They are not thinking about questions like: How can I get my salary to go up? Or how can my children get a better education so they can get a better job? They are not thinking about these fundamental economic things. They are thinking about things like: “Oh my god, I bought this villa in Langfang. The price is up 40%. Should I sell now? Or will it go up another 60%?” That’s what the government is thinking about, too, because that’s the way to drive growth and the way they get people excited and to get them to buy into the idea of the great Chinese miracle.

There have been warnings about a bubble in China’s housing market for some time now. How hot is the real estate market?

So far this year has been crazy, particularly in the area around Beijing. Just a few weeks ago I was in this little rustbelt city called Zhuozhou in the Hebei province where the steel mills are. It’s a very unpleasant place to spend time. It’s very polluted, there’s nothing to do, the food is bad and the landscape is awful. It’s just no place you want to be and yet property prices have doubled, tripled and in some places even quadrupled in a year.

What’s fueling this boom?

It’s like in every property bubble: People build these stories. In Florida for example, the idea in the housing bubble was that all Americans are going to retire there. Florida has nice beaches, it’s warm and Americans are getting older, so everybody’s going to retire there. In China, the idea is that all these areas 200 miles outside of Beijing are going to be bedrooms for the working class of Beijing. So they’re going to build subways, schools, hospitals and other public facilities there and the prices are going to go up. The story goes that all these people who can’t afford to live in Beijing but work there are going to live in places like Zhuozhou instead and that they are going to take the high speed rail into Beijing. Everybody is speculating like mad but in the end nobody wants to live there.

And how are such ghost towns financed?

There is probably no company that is more representative of the investment bubble than Evergrande. It’s the biggest pyramid scheme the world has yet seen. Evergrande is highly leveraged and has like 270 projects all over the country. I have been easily to 40 of them yet I have only seen one that was fully occupied. Many of these projects are megalomaniac visions and totally empty. Yet you go to these places and you see their sales room filled with young buyers. When I open my eyes I see crumbling stone and empty jungles or deserts. What they see is a future with wealthy Europeanized people strolling on modern paths. It’s just amazing. It’s a mass illusion and Evergrande more than any of these developers plays to this illusion by building developments that are specifically positioned for the investor, not to live there but to buy for some future appreciation in price.

How long can these crazy times last?

I’ve been wondering that for years now. In a few places, property bubbles already have popped but the government keeps information from going out. Back in 2011 for instance, there was a property bust in the region of Ordos where most of China’s coal is. Prices dropped like 50% but if you looked at the official statistics they may have dropped 4%. Another place was in Wenzhou which is a place in China’s Zhejiang province where there is a lot of private money. After the bubble popped the central government had to go in and had to create a bailout fund. But nobody ever got information about it. In fact, all the newspapers put out information about how actually Wenzhou is fine.

So will China’s housing frenzy ever come to an end at all?

China is going to hit a wall. They’re not positioned to take the political pain that’s entailed by just stopping with all that madness. So there will be a bust but it’s very hard to say exactly how long it takes. Basically, there are two paths. One of them is you break public confidence in some way. For that to happen you have to have a bank failure, a well-known investment product that doesn’t pay or some property developer that goes bust. You’ve had that locally in all sorts of places but you have to have a really big bust that everyone is aware of.

And what would be the other path?

The other thing that eventually has to happen is that the Chinese currency has to devalue. The reason why the developers can just keep on selling is because they keep getting refinanced. All the refinancing means that China has to keep on expanding the money supply and when you keep on expanding the money supply you have too much money and the value of the money declines. Obviously it’s not quite that simple but that’s basically what’s going on. For now, the only reason foreign corporations like BMW (BMW 79.21 -0.1%) or Swatch Group (UHR 376.3 -0.34%) are willing to take exchange rate of around 6.7 Renminbi to the dollar is because the Chinese government is standing behind the exchange rate paying those dollars. But at some point that has to stop because the Chinese government won’t have those dollars anymore.

Then again, the outflows of China’s foreign exchange reserves seem to have stopped.

Certainly they have cooled down since 2015/16. But that’s more of a pause than anything else. Also, China had a lot of advantage from the weak dollar recently. What’s more, I think there is also a lot of monkeying in the numbers. If you look at all the accounts other than the US dollar reserves and other hard currency reserves, they run flat to negative every month. And yet they show rising reserves in total. So if you want to be generous then you can say: maybe they are telling the truth but it’s all valuation improvements. If you want to be less generous about it, you can say they’re just fudging the numbers. So one way or the other: China has not reported any incoming hard currency.

Another mystery is China’s cracking down on companies like HNA that have been very active overseas in terms of acquisitions. What’s your assessment of these interventions?

It all began with the insurance regulators. In February, they kidnapped Xiao Jianhua, the head of the private Hong Kong insurer Tomorrow Group, and took him back to the mainland. He is viewed as some type of family office manager to the high families in China. That means he knows a lot about who has money in China and where. Nobody really knows what’s going on with him, if he’s alive or not. He has certainly been under interrogation. Since that time, there have been a lot of regulatory actions against insurance companies. First the chairman of the insurance regulatory commission stepped down and was prosecuted. And now, companies like HNA, Wanda, Anbang and Fosun are under investigation. Their communality is that they all raise money from the public through insurance products which in reality are mainly investment products with a little tiny bit of insurance attached.

And where’s the link to the overseas acquisitions? In Switzerland for example, HNA has bought several companies, among them Gategroup, and just recently became the largest shareholder of the travel retailer Dufry.

HNA and the other companies have been raising money from these investment products and then using that money to buy overseas assets. They haven’t necessarily swapped the currency. But what you can do is you can deposit Renminbi in China and then take a loan from an overseas bank based on that deposit. So you could theoretically default on that deposit and still have the hard asset.

What’s the problem with that?

That means you’re basically exchanging Renminbi for dollars. The regulators don’t want these companies to take out the extra liquidity that the People’s Bank of China is putting into the domestic economy and transfer it overseas. That’s the issue. There are some elite power dynamics going on as well but we can only speculate on that. What we do know is that they don’t like it when people are taking money out of China.

This fall, all eyes are going to be on the 19th National Congress of the Communist Party. What will this major event mean for the future course of China?

Here’s an interesting thing: a lot of analysts within China have opinions about which politicians on the Politburo will remain and which politicians will step down. But if you ask anybody about what difference does it make, nobody has an answer. That just tells you it surely makes a difference. But we just don’t know what the difference is. Nobody knows except the people within the Chinese government. Also, in China, when you retire from a high government position you’re not allowed to leave the country. So there’s a kind of universal code of Omertà that no one breaks. That’s why there’s so little that we understand about Chinese elite politics and how the government with its different factions and infights works. Who’s against whom? Who’s fighting for what? Nobody has any idea.

What’s the perception of Chinese President Xi Jinping with respect to the new administration in the United States?

When Donald Trump was elected everybody in the Chinese government was happy. They were saying “Wow, this is the luckiest thing that ever happened to us, even better than Brexit“. Then Trump invites Xi to his “palace” in Florida. He has his grandchildren sing Chinese nursery rhymes and thinks he made a deal. But in reality, China is laughing all the way to the bank.

Why?

Because they were looking forward to a weaker United States and to a weaker dollar. And the weaker the dollar is the stronger the Renminbi is. In addition to that, Trump talks a lot of his great plans for the US economy. But his only agenda for himself is to undo Obama’s legacy. Of course, with the Republican Party it’s a little bit different. But that’s Trumps goal. China had its headaches with the Obama administration. One of the things that China most disliked was the Trans Pacific Partnership agreement which would have been of high advantage to the United States and US corporations. That’s why China hated the PPT and it spend a lot of time stewing over it. So of course China loved it when Trump came in and said: “The US is stepping out of the TPP“.

Now, the world looks with unease at the growing tensions between North Korea and the United States. What’s the take in Beijing on this lingering conflict?

People often project to China great geostrategic goals that are not really there. Also, China probably has less control over North Korea than we think. In general, it seems that China never really wants to involve itself with the rest of the world when it comes to influence and change with respect to international organizations. It’s more like China participates in order to take what it needs at the moment. There’s a remarkable lack of strategic vision and long-term guidance. That’s true for aspects of diplomacy as well as security.

Yet China invests heavily in defense, builds its own aircraft carriers and has built new military facilities on artificial islands in the South China Sea.

In contrast to the United States, China doesn’t have a lot of military bases in Asia. So it’s definitely anxious about the power of the US in the region. But you can’t extrapolate from this that China wants to step into the role of the US because empirically that’s simply not true. It’s not the case because China is peaceful or incapable. It’s because China’s external goal is all about making money for the government and for Chinese corporations. It’s purely a mercenary interest. So I doubt that China is ready to take advantage of the weakness of the United States. Probably that advantage goes to someone else and my bet right now is on Europe.

Nevertheless, China’s economy has seen an astonishing rise and the country is now the second largest power in the global economy after the United States.

In the West, we tell ourselves this narrative about a rising people who are taking their place in the world. But when you look at the simple evidence in front of your eyes what you have is a very small group of powerful people in the government who have managed to aggregate enormous resources and waste them on empty projects to fill their own pockets. But that does nothing for the people. That’s not to say that the Chinese people themselves have not achieved great economic progress over the last thirty years. But a big chunk of their economic wealth is being stolen.

So what does that all mean for investors?

That doesn’t mean that China is a pile of junk. There are a lot of good companies and there is a lot of strength in the Chinese economy. We will see that after the burst of the bubble and after the country has gone through a couple of years of recession and the Renminbi has devalued a lot. Then, China will gradually come back, the investment portion of GDP will drop and the consumption portion of GDP will rise. Among other things, this means improving margins for food and drink companies like Tingyi and Vitasoy. So on a long term perspective their stocks look a lot cheaper than they are now.

 

Chinese Home Prices "Unexpectedly" Rebound; Government Loses Interest In "Curbs"

On Friday, we summarized research reports from Deutsche Bank and Bank of America, which came to the same conclusion: the fate of the global economic rebound may be in the hands of the Chinese housing bubble, which through price appreciation has unleashed wealth effect equivalent to twice the annual disposable income of China.

 

We concluded by saying that those who are looking for key inflection points to determine the future trajectory of the global economy, in addition to the global (read Chinese) credit impulse, we suggest keeping a close eye on what happens with Chinese housing, which has become a - if not the - top variable for the fate of the both the great inflation-deflation debate, as well as the overall fate of the world economy

The key variable is "how Beijing manages to deflate the existing bubble: if it fails to be aggressive enough, home prices will once again spike, leading to an even more precarious bubble. If it is too aggressive, a hard landing is in store, coupled with what a crash in the country"s financial system, where the bulk of the banks" $35 trillion in assets is collateralized by housing values. While such a crash may not necessarily lead to a catastrophe for China, where the government ultimately backstops all the banks, the deflationary wave spread around the globe from a housing crash would be dire."

One answer was revealed just hours later, when on Saturday China"s NBS revealed that following two months of broad but shallow declines, in February there was an unexpected rebound in Chinese home prices, which last month rose in more cities despite increased "restrictions" on property transactions by local authorities. As Bloomberg reported, new home prices, excluding subsidized housing, gained in February in 56 out of 70 cities tracked by the government, compared with 45 in January, the National Bureau of Statistics said Saturday. Furthermore, prices climbed in 67 out of 70 cities from a year earlier, compared with 66 in January. 

As Goldman calculates, prices in the primary market increased 0.4% month-over-month after seasonal adjustment (weighted by population) in February, the same as the growth rate in January.

And while on a year-over-year, population-weighted basis, housing prices in the 70 cities were up 12.0%, slightly lower than 12.4% yoy in January, the nuance was once again among the various city ties. On month-over-month basis, house price growth diverged among different city tiers. Home price inflation decelerated in tier-1 cities, but home price inflation in tier 2/3/4 cities was steady or accelerated, which goes back to the core issue discussed last Friday: for all the talk about moderating home prices, China is first and foremost focused on preserving the wealth effect, which a sharp drop in home prices would crush.

February average price growth was 0.2% month-over-month after seasonal adjustment in tier-1 cities, vs. 0.3% in January. Average property price inflation in tier 2/3/4 cities was 0.6%/0.4%/0.5% month-over-month sa in February, vs 0.5%/0.4%/0.3% in January.  Indeed, as Bloomberg Intellgience wrote earlier in March, braking measures to counteract soaring home prices in eastern China’s largest cities appear to be diverting demand to smaller ones. Saturday"s data confirms this.

* * *

The unexpected pick up in prices takes place as various Tier 1 cities are taking further measures to cool the market: among them, Beijing on Friday raised down-payment requirements for second homes 10 percentage points to between 60 percent and 80 percent. The rule also applied to buyers who don’t currently own a home but previously had a mortgage with the same down-payment threshold, making it harder for someone to sell their house to upgrade to a bigger or more expensive property.

Other cities taking additional measures were the southern export hub of Guangzhou, coastal Qingdao and Nanjing in the southeast have also tightened measures. Changsha, the capital of inland Hunan province, joined the ranks on Saturday after the home price data release.

“The government intends to pause the surging home prices, and let them walk steadily up later,” said Xia Dan, a Shanghai-based analyst at Bank of Communications Co., adding that if curbs on demand are lifted, prices will rise further. “The government doesn’t want the prices to run all the time and ferment bubbles.”

As Bloomberg notes, China’s biggest cities have seen a round of home price surges in the past year. In Beijing, new home prices rose 24 percent in February from a year earlier, while Shanghai saw a 25 percent gain. Shenzhen prices increased 14 percent in the same period.

“Beijing’s tightening will have a short-term effect to stabilize the market, but the power of policy has become increasingly weaker,” Zhang Hongwei, a research director at Shanghai-based Tospur Real Estate Consulting Co., said Friday, adding more local tightening may follow.

Or maybe not, because one may ask: is the rebound really unexpected. Perhaps not: as the WSJ reported on Sunday, "this year it seemed China was finally going to make headway on an idea familiar to U.S. homeowners: a property tax.

For many Chinese families, owning a home is one of few options to build wealth, driving buying frenzies as people rush to purchase before prices soar. Imposing costs on homeowners through a property tax is seen as a way to tame such speculation, while also helping fund local governments.

Lu Kehua, China’s vice housing minister, last month said the government needed to “speed up” a property-tax law. Economists and academics have long recommended the move.

Yet the annual National People’s Congress came and went this month with no discussion of the topic. An NPC spokeswoman said a property tax wouldn’t be on the legislative agenda for the rest of the year.

In short, China evaluted the risk of a potential housing bubble burst, and deciding that - at least for the time being - it is not worth the threat of losing a third of Chinese GDP in "wealth effect", got cold feet. Expect the recent dip in home prices to promptly stabilize, with gains in the short-term more likely that not.

As China's Housing Minister Admits There Is A Bubble, Axiom Warns "Sell Commodities Now"

After several months of slowing price growth across China"s bubbly housing market, if mostly in the lower-tiered cities, last month we reported that China"s National Bureau of Statistics confirmed that the latest Chinese housing bubble has finally popped, after housing prices across the 70 cities tracked by the NBS were up 12.7% Y/Y, below the 12.9% annual growth rate in November. This was the first deceleration in year-over-year housing price growth after 19 months of continued acceleration.

Then, overnight, China reported that after the November peak, January house prices decelerated again, and according to Goldman calculations, on a year-over-year, population-weighted basis, housing prices in the 70 cities were up 12.4% vs. 12.7% yoy in December, and 12.9% in November, the second consecutive month of deceleration.

On year-over-year basis, housing price growth moderated in January

On a month-over-month basis, house price inflation decelerated modestly in tier-1 and tier-4 cities, and remained stable in tier 2 and tier 3 cities: In tier-1 cities, January price growth was 0.3% month-over-month after seasonal adjustment, vs. 0.5% in December. In tier-4 cities, property price growth was 0.2% month-over-month after seasonal adjustment, vs. +0.3% in December. Average property price inflation in tier 2/3 cities was 0.5%/0.4% month-over-month after seasonal adjustment respectively in January.

Average house price inflation stabilized in January compared with December

According to Goldman"s China analyst, Maggie Wei, "we expect property transactions and house price inflation to slow this year from the rapid growth last year. On the other hand, property construction and investment activities may remain solid, supported by the strong land sales last year. We forecast only a small moderation in property FAI growth this year compared with last year."

Consultancy giant McKinsey, which also is never too late to point out the obvious, said earlier on Wednesday that it sees "early signs of slowdown in China property market", with McKinsey partner Oliver Ramsbottom speaking at an iron conference in Dalian adding that “our belief is that in property market we’re starting to see a slowdown." He added that slower mortgage lending will be key indicator for slowing starts and completions, and that the government"s reaction to growth of price appreciation suggests increased focus on cooling, and slower starts.

As a result, he expects cooling in demand for recently red hot commodities such as steel and iron ore.

Another analyst who sees the bursting of China"s housing bubble as a big negative for commodities is Axiom Capital"s Gordon Johnson, who likewise looked at China"s slowing housing data and asked, rhetorically "what’s the significance of these data points?"

His answer: "the last time we had 18 consecutive months of home price acceleration in China (7/31/12-to-12/31/13), iron ore prices rallied, as did steel prices; yet, when year-over-year (“y/y”) growth in home prices turned negative 1/31/14, it marked the beginning of 16 consecutive months of deceleration in home prices, which also ushered in a collapse in both steel prices and iron ore prices, as well as other bulk commodity prices – we remind our readers that Chinese investors use home price growth, y/y, as a catalyst to invest in real estate in China (real estate, by far, is the most steel-intensive sector in China)."

As a result, with the second consecutive deceleration in home
price growth in China in 20 months, Axiom sees imminent risk to construction
activity, and thus steel/iron ore prices.

His suggestion: sell commodities now.

Furthermore, Johnson has noticed a troubling trend when looking at land sales in China. As detailed in the chart below, land sales in China have shown an acute falloff recently. He reminds readers that land sales are a key funding source for local governments in China, and also lead key indicators of Chinese growth, like freight volumes, by around six months.

Johnson"s conclusion: "We see C1Q17 as the exact opposite of C4Q16 (i.e., stocks are rallying, despite what we see as a pending downturn in economic data points in China); with the data already beginning to support this narrative, yet investors completely ignoring it at present, we see an acute reversal in the commodity stocks as likely. At risk of stating the obvious, we do not believe this is consensus thinking at present."

And speaking of rallying stocks, we pose the same question we asked - rhetorically - last month: "now that the Chinese housing bubble has finally hit its inflection point and is headed downward, prompting the momentum chasers to flee, the question is whether the Chinese stock market is about to become the bubble choice du jour, as happened in mid to late 2014 and early 2015, when the bursting of the home bubble once again pushed all the housing speculators into the stock market with scary, if entertaining, consequences. It may not be a bade idea to buy some deep out of the money calls on the Shenzhen composite, as that is the place where the most degenerate of Chinese gamblers eventually congregate to every time the housing bubble bursts, only to be reincarnated two years down the line."

With headlines such as this one in Caixin from last week, "China Relaxes Curbs on Stock-Index Futures Trading", the answer is clearly yes.

Finally, while China will do everything in its power to assure another soft landing for the burst Chinese housing bubble, a curious headline popped up moments ago, one which may assure a far more aggressive selling for Chinese real estate in the coming months: according to Bloomberg,  "China Is Doing Preparation Work on Property Tax: Vice Minister" adding that "China will unveil property tax in “timely” manner, Lu Kehua, vice minister of the Ministry of Housing and Urban-Rural Development, says at a briefing in Beijing."

Meanwhile, China"s Housing Minister Chen Zhenggao said at the briefing China property prices to “continue to stabilize” in 1Q, and admitted that mainland real estate is about to crash when he said that "China will contain the property bubble and prevent large fluctuations in property market."

Well, thanks for the admission, because few things inspire confidence in artificial real estate values quite like the threat of imminent property taxes (which only those who sell now won"t have to pay) coupled with the local housing minister admitting the entire housing market in a bubble that has now burst.

As Its Housing Bubble Pops, Chinese Real Estate Firms Halt Monthly Pricing Data

That didn"t take long.

Earlier this week we reported that after 19 straight months of continued acceleration in home prices, China"s latest housing bubble may have finally burst (again) after December prices in the 70 cities tracked by the NBS, rose by 12.7%, below the 12.9% annual growth rate in the previous month - the first annual decline in nearly 2 years.

 

 

Fast forward to Friday, when at least two
major Chinese private providers of home price data stopped
publishing the figures, just as the housing market is stating to cool off at a dramatic pace across all Tier cities. According to Reuters, the
China Index Academy, a unit of U.S.-listed Fang Holdings, has stopped
distributing monthly housing price index data for 100 cities that it
usually issued at the start of the month. The academy said it had suspended distribution indefinitely, without giving a reason for the suspension.

"I don"t know who exactly is making the order, and it"s not mandatory," said a source with knowledge of the matter, who declined to be identified as the topic is a sensitive one.

Home price data from private providers tends to show sharper increases than official data from the National Bureau of Statistics (NBS), which publishes monthly and annual percentage changes in 70 major cities. It also overextends on the downside, which according to official data, has now begun, and may explain the self-imposed censorship.

Since last summer, in an attempt to cool the overheating housing market, China"s government had levied curbs on buying and ownership to rein in soaring prices and limit asset bubble risks. E-house China, another influential private real estate consultancy also indefinitely suspended its monthly housing price index for 288 cities.

"Judged by current conditions, we won"t publish it in the future," said Cherilyn Tsui, a public relations officer at CRIC, the consultancy"s real estate research branch. "We stopped distributing prices data a few months ago. At first it was just no external distribution, but now even internally we don"t distribute any more," she told Reuters.

While Tsui said she did not know the reason for the halt, she added that data on sales volumes and inventories would still be published.

"Housing prices are an extremely sensitive matter right now," a second source with knowledge of the matter told Reuters. Perhaps the reason is that having created a massive bubble to the upside, Beijing is hoping to delay the descent in prices  in order to attain a smooth landing at a time when China is already faced with record capital outflows, a plunging currency and all time high levels of debt.

E-house"s last data release in November said new home prices in Beijing and Shanghai rose 1.32 percent and 1.09 percent in October, respectively, on the month. The NBS reported an increase of 0.5 percent. In light of the slowdown reported by the official data, one can surmise that the December print would have been quite dire.  In China Index Academy"s last data release in December, new home prices in Beijing and Shanghai rose 0.84 percent and 0.88 percent in November, while the NBS reported prices unchanged.

The NBS usually publishes price data around the 19th of the month, and private providers issue it earlier.

Meanwhile, the NBS denied it had ordered the data suspension. "We didn"t ask that. It"s not true," an NBS representative told Reuters by telephone, when asked if it had asked private real estate consultants to halt distribution.

Why would one doubt the sincerity of Chinese government organization? Perhaps the same reason that also last week, China - facing daily smog alerts and a population which has grown weary and angry of Beijing"s unwillingness to address the issue - ordered its local weather bureaus to stop issuing smog alerts.

Which brings us back to a question we asked earlier in the week: if, as circumstantial evidence shows, the Chinese housing bubble has finally hit its inflection point and is headed downward, prompting the momentum chasers to flee, the question is whether the Chinese stock market is about to once again become the bubble choice du jour, as happened in mid to late 2014 and early 2015, when the bursting of the home bubble pushed the housing speculators into the stock market with scary, if entertaining, consequences. And, as we concluded, "it may not be a bad idea to buy some deep out of the money calls on the Shenzhen composite, as that is the place where the most degenerate of Chinese gamblers eventually congregate to every time the housing bubble bursts, only to be reincarnated two years down the line."

News like today"s only validates our suspicion that Chinese stocks are about to soar yet again.

Chinese New Home Prices Soar by 12.4% in December -- Higher by 25% in Tier One Cities

What can go wrong, after all? The Chinese government has already informed us their real estate market, which is being driven by records amount of debt, is NOT in a bubble, so relax, chill and enjoy a large overflowing bowl of wanton soup.

Take Larry Hu, for example, economist from Macquarie. He posited, back in October, that the +25% year over year price jumps for Chinese property wasn"t indicative of a bubble...because MUH lack of supply. Perfectly normal stuff.

Source: BBG

Big cities like Shanghai are experiencing net immigration with only limited blocks of land coming on the market. “If Shanghai sells only one parcel of land in a year, the price of the land must be extremely high – this is not a bubble; this is a shortage of supply,” Hu said.

We can revisit a litany of smug remarks by any number of US economists before the US housing market collapsed -- almost mocking those who warned against unchecked gains in property prices.

Take, for example, the missives of Jonathan McCarthy and Richard W. Peach -- senior economists at the NY Fed.

"Home prices have been rising strongly since the mid-1990s, prompting concerns that a bubble exists in this asset class and that home prices are vulnerable to a collapse that could harm the U.S. economy.
 
"A close analysis of the U.S. housing market in recent years, however, finds little basis for such concerns. The marked upturn in home prices is largely attributable to strong market fundamentals: Home prices have essentially moved in line with increases in family income and declines in nominal mortgage interest rates."

 
Or, we can look back at the advice of Chris Flanagan, head of ABS Research, JP Morgan -- and laugh at how stupid he was.
 

"Based on what we know and see in terms of employment and interest rates, it is extremely difficult to see how five years from now we could be looking back and observing a historical 5-year growth rate of, say, less than 5%. That should be more than adequate to support the continued good credit performance of sub-prime mortgage pools.
 
"It is important to understand — we can contemplate home price growth rates declining, albeit modestly, but we do NOT envision home prices declining!"

 
This out of China tonight -- record home prices.
 

Source: Beijing Monitoring Desk
Average new home prices in China"s 70 major cities rose 12.4 percent in December from a year earlier, slowing slightly from a 12.6 percent increase in November, an official survey showed on Wednesday.
 
Compared with a month earlier, home prices rose 0.3 percent nationwide, slowing from November"s 0.6 percent, according to Reuters calculations from data issued by the National Bureau of Statistics (NBS). Shenzhen, Shanghai and Beijing prices rose 23.5 percent, 26.5 percent and 25.9 percent, respectively, from a year earlier.
 
Monthly growth in Shanghai and Shenzhen slowed but was unchanged in Beijing as local governments" tightening measures took effect. China relied heavily on a surging real estate market and government stimulus to help drive economic growth in 2016, but policymakers have grown concerned that the property frenzy will fuel price bubbles and risk a market crash, with serious consequences for the broader economy. Soaring home prices have prompted more than 20 Chinese cities to tighten lending requirements on house purchases, while regulators have told banks to strengthen their risk management on property loans.

 
Hindsight is 20/20 and it"s never easy to time tops or bottoms. But this is child"s play. None of these gains are due to some grass roots renaissance, thanks to some technological breakthrough or keystone event that caused prices to jump. The price jumps in China are due to record levels of debt, leverage, greed, avarice, and wanton chicanery.
 
It"s most definitely a bubble -- whether it cracks this year or not is anyone"s guess.

Content originally generated at iBankCoin.com