China Data, Part 1A: More on Property Downturn
I’m working on the promised next installment of data points on the Chinese economy as it enters 2012, but in the meantime, I wanted to quickly share a couple of interesting new property-related data points which have come my way since my last post:
- First, two on-the-ground reports about the property bubble bursting in 2nd-tier cities. Bloomberg offers this report on Sanya (on China’s southern island province of Hainan) where the frenzy to pick up vacation villas has taken a nosedive, with home prices dropping 28% year-on-year in November and sales volume off 52%. Steve Dickinson, based in Qingdao (in the northeast coastal province on Shandong) reports on ChinaLawBlog.com that developers there are regularly offering 30-50% discounts and that construction on uncompleted projects has slowed. He says “the collapse in the real estate market has already occurred” and the only remaining question is how the government will pick up the pieces. In a related post, he relates the story of a Qingdao couple who now find themselves deep underwater after going into debt to buy a unfinished apartment at the peak of the market. Events in Sanya and Qingdao reinforce my point that China’s property bubble — and its consequences — is really a nationwide phenomenon, by no means limited to Beijing and Shanghai.
- Caixin offers this report on the huge stress that plummeting land sales are putting on local government finances. As one expert declares, “The land market is basically deadlocked” as developers enter “winter mode” and stop buying land for new construction projects — a description eerily reminiscent of my own warning, at The Economist China Summit last month, that “winter is coming.” Again, the problem is even more serious in 2nd and 3rd-tier cities (Dalian’s revenue down 50%, Wuxi’s by 34%, Nanjing by 29%, Wuhan by 21%) than in Beijing (down 14.4%)and Shanghai (down 13%). The revenue shortfall is making it hard for some cities to pay for basic services like police and hospitals, much less repay the massive amount of debt they borrowed for stimulus projects — which, according to this report from Bloomberg, may be much larger than official statistics suggest. Interestingly, Caixin reports that some city governments are forcing local developers to continue buying land whether they want to or not — which makes local efforts to loosen up lending look less like real economic stimulus and more like a dangerous game of pass-the-buck.
- Anne Stevenson-Yang of J Capital Research here in Beijing sent me one of their reports, which outlines various ways developers are offering hidden discounts — such as group discounts, no-fault returns, buy-one get one free deals, and gifts (like luxury cars or bars of gold) — that don’t show up in official price statistics, which means the real price collapse may be even worse than those figures indicate. Again, discounting was actually more severe in 2nd and 3rd-tier cities like Chengdu, Hefei, and Kunming than in Beijing and Shanghai.
- I was reading through a recent report by Pivot Capital when I came across the following factoid, which set me back a bit. It turns out that the average home price in Guiyang — the capital of Guizhou, the poorest province in China — is now nearly the same as in Phoenix, Arizona, a city roughly the same size (4 million people) but with a per capita GDP about 10x Guiyang’s.
Finally, I just have to remark that I find it a real hoot when I read officials claiming — and credible media reports repeating the claim — that plummeting property prices across China are evidence that the government’s top-down “cooling” measures are “taking effect” and “working.” Keep in mind, the central government started putting its most prominent administrative controls, such as purchase restrictions, into effect in April 2010 — nearly two years ago — and began trumpeting their success a mere two weeks later. The reason we are where we are now is because property developers ignored those measures and piled up unsold inventory for nearly two years in the not-unreasonable belief they could call the government’s bluff. (I said as much at the time, on Chinese TV — see interview on May 18, 2010, beginning at point 23:50). Even when rapid credit expansion caused inflation to balloon, forcing the central bank not exactly to tighten, but at least rein in the pace of that expansion, authorities turned a blind eye to an explosion in off-the-books shadow credit that kept funding land purchases and construction, and applauded when statistics showed real estate investment continuing to grow at 25-30% year-on-year — until this Fall, when the growing need to roll over bad debt while keeping inflation in check made it well-nigh impossible to keep throwing money at this boom. That’s when developers ran out of money and had to start liquidating, and the bottom finally fell out of the market. For officials to claim that their policies are “working,” in some kind of reliable fashion, is like a doctor standing over the stone-cold corpse of his patient claiming that he cured the man of his fever. No more fever, right?