Andy Xie discusses the potential to delay the day of reckoning in the Chinese property bubble. This is the punchline:
China’s property market is a massive bubble. The stock of residential properties, developer inventories and land pledged to banks by local governments exceed by three times the nation’s gross domestic product. Rental yields in most cities fail to cover depreciation costs. The price-to-income ratio, a measure of housing affordability, is routinely above 20 in major cities, which means an average Chinese citizen would spend his or her entire income for 20 years to buy an average-priced property.
The bubble can continue because China’s banking system has plenty of liquidity, partly thanks to hot money and because governments have many levers to channel bank liquidity into the market. But the longer the bubble lasts, the more damage it will do to the economy.
Today on tumblr, Ethan Rabidoux provided an amusing analysis of the Canadian housing bubble. He references the recent report by Alexadre Pestov (pdf link here for those that dislike reading reports through scribd). Rabidoux agrees with the argument that the trigger for the Canadian bubble collapse will be a rate hike. I’d like to offer that the Olympic Village being converted to condos and adding significantly to inventory may also be a possible trigger.
One thing that I am occasionally guilty of is looking at these foreign housing markets and assuming US norms. In particular, I sometimes subconsciously assume the standard 30 year mortgage or worse. That may or may not be applicable (for example: in Latin America, down payments are usually much larger and financing duration much shorter). As a consequence, I consciously look for explicit confirmation of such things. Rabidoux highlights the evidence for the Canadian market:
All these programmes (35-40 year ammortization, 0-5% down) have a common theme – they cannot last forever. The more of them used to stimulate the market to new highs, the greater the collapse will be once they are exhausted. Many will say that by taking drastic measures, the Canadian government prevented the disaster. It must be understood the disaster was not averted, but postponed. The structural imbalances within the system were not eliminated, they were worsened.
The exact mix of the homeowners’ financing terms isn’t easily available, but the trend is certainly frightening. For the Chinese bubble, such data simply isn’t made available, but the speculation is that they are at a much more solid foundation (like Latin America). There are other problems with China, though. Uninhabited cities, vacant supermalls, and business districts with no businesses represent a mis-allocation of resources. Affordability metrics may not be the most important factor leading to their eventual collapse.
Once again, I’m far too lazy to look for support right now, but you should probably keep an eye out for Australia. I think they’ve been rather lucky so far, and I have some doubts that they will face a housing collapse without first seeing catastrophe in China (further dips might be likely without collapse). This is pure speculation, and the actual financing practices (historical, current, and future) in Australia are an important variable. The commodities link to China will be important for Australia’s overall economic health, independent of their housing market health.
