Housing Crash in China Steeper than in Pre-Lehman America

China has long frustrated the hard-landing watchers – or any-landing watchers, for that matter – who’ve diligently put two and two together and rationally expected to be right. They see the supply glut in housing, after years of malinvestment. They see that unoccupied homes are considered a highly leveraged investment that speculators own like others own stocks, whose prices soar forever, as if by state mandate, but that regular people can’t afford to live in.

Hard-landing watchers know this can’t go on forever. Given that housing adds 15% to China’s GDP, when this housing bubble pops, the hard-landing watchers will finally be right.

Home-price inflation in China peaked 13 months ago. Since then, it has been a tough slog.

Earlier this month, the housing news from China’s National Bureau of Statistics gave observers the willies once again. New home prices in January had dropped in 69 of 70 cities by an average of 5.1% from prior year, the largest drop in the new data series going back to 2011, and beating the prior record, December’s year-over-year decline of 4.3%. It was the fifth month in a row of annual home price declines, and the ninth month in a row of monthly declines, the longest series on record.

Even in prime cities like Beijing and Shanghai, home prices dropped at an accelerating rate from December, 3.2% and 4.2% respectively.

For second-hand residential buildings, house prices fell in 67 of 70 cities over the past 12 months, topped by Mudanjiang, where they plunged nearly 14%.

True to form, the stimulus machinery has been cranked up, with the People’s Bank of China cutting reserve requirements for major banks in January, after cutting its interest rate in November. A sign that it thinks the situation is getting urgent.

So how bad is this housing bust – if this is what it turns out to be – compared to the housing bust in the US that was one of the triggers in the Global Financial Crisis?

Thomson Reuters overlaid the home price changes of the US housing bust with those of the Chinese housing bust, and found this:

The US entered recession around two years after house price inflation had peaked. After nine months of recession, Lehman Brothers collapsed. As our chart illustrates, house price inflation in China has slowed from its peak in January 2014 at least as rapidly as it did in the US.

Note the crashing orange line on the left: year-over-year home-price changes in China, out-crashing (declining at a steeper rate than) the home-price changes in the US at the time….

The hard-landing watchers are now wondering whether the Chinese stimulus machinery can actually accomplish anything at all, given that a tsunami of global stimulus – from negative interest rates to big bouts of QE – is already sloshing through the globalized system. And look what it is accomplishing: Stocks and bonds are soaring, commodities – a demand gauge – are crashing, and real economies are languishing.

Besides, they argue, propping up the value of unoccupied and often unfinished investment properties that most Chinese can’t even afford to live in might look good on paper, but it won’t solve the problem. And building even more of these units props up GDP nicely in the short term, and therefore it’s still being done on a massive scale, but it just makes the supply glut worse.

Sooner or later, the hard-landing watchers expect to be right. They know how to add two and two together. And they’re already smelling the sweet scent of being right this time, which, alas, they have smelled many times before.

But it does make you wonder what the China housing crash might trigger when it blooms into full maturity, considering the US housing crash helped trigger of the Global Financial Crisis. It might be a hard landing for more than just China. And ironically, it might occur during, despite, or because of the greatest stimulus wave the world has ever seen.

Stocks, of course, have been oblivious to all this and have been on a tear, not only in China, but just about everywhere except Greece. But what happens to highly valued stock markets when they collide with a recession? They crash. Read… What to Expect When This Stock Market Meets a Recession

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  13 comments for “Housing Crash in China Steeper than in Pre-Lehman America

  1. Mary says:

    You have a real gift for writing about economics in a way that’s comprehensible for a non-specialist.
    Thank you.

  2. Petunia says:

    I lived through the financial crisis in Florida, ground zero of the housing collapse. Prices in Florida fell 50% to 80%. Many of the homeowners who managed to hang on to their homes are still severely underwater. Those homeowners who got mortgage modifications saw their mortgages extended to 40 year terms with all the fees and overdue payments added to the mortgage amount. Their mortgage payments went down, but they will never own their homes because the houses are underwater too.

    The decrease in price in China may be bad, but from where I am, it doesn’t even come close to what happen in the U.S.

  3. Mike R> says:

    I really don’t believe any stats coming out of China. Only those that can be inferred from outside of China (e.g., oil demand) or first hand insider accounts would I consider.

    That said, I have no doubt that China is struggling. I think the rapid drop in oil demand in 2014 second half was caused largely by China’s economy declining.

    We may never fully know how bad it falters over there.

  4. MC says:

    Well, one thing that “easing” the People’s Bank of China unleashed was to prop up local financial markets. I was just checking my investments in Shanghai and they are doing as fine as they were doing a month ago. Yes, I have the hand on the eject lever, but as long as there’s a system to misuse I’ll be strutting down the mountain in brand new shoes.
    For me the only question right now is this: Chinese savers and investors are rather different from their Western counterparts.
    While Westerners have an almost childish faith in the omnipotence of legislators and central bankers, Chinese tend to be wary of them, and for good reasons. Their line of reasoning is to make as much money and buy as much stuff as you can right now because you’ll never know what the central planners in Beijing will come up with next. In short, as absolute as the power of the Communist Party is, the ruling caste’s hold on people’s minds is far more tenuous than in the West. A false step and savers and investors will go into fully defensive mode, stashing gold and banknotes under their mattresses and stopping spending in a split second.
    That’s the reason why the Communist Party is so desperate to keep the party going for as long as possible: they literally have to buy their own people, day in, day out, to meet their own ludicruous GDP growth targets. GDP is a measure of how much money is spent, not of what people have hidden under their beds.

    • Don Robertson says:

      “In short, as absolute as the power of the Communist Party is, the ruling caste’s hold on people’s minds is far more tenuous than in the West. A false step and savers and investors will go into fully defensive mode, stashing gold and banknotes under their mattresses and stopping spending in a split second.”

      Bingo. And that reassures us the ongoing Chinese housing crunch just a mild symptom of what is in store for the Chinese future during this New American Century.

      Poverty is relative, and generally infuriating. When it is forced on a class of people that think they are entering the middle class, poverty is revolution inspiring.

      Unlike Americans, who generally blame everyone from retiring school teachers to the president, the inspired Chinese aspirants to their relatively new and small (read elite) middle class know exactly who to blame. They have a strong tradition for dealing with them too.

      And gold is one of the keys that turn of this screw too. How much will gold be worth, when the Chinese and the Indians, like the Greeks and the Italians, have less money to spend on the yellow metal? They all have less money to spend on it every day now.

      I watched gold last night trade to $1220, up 1.5%. When New York opened up, the gains were quickly halved. CEF (a Canadian gold hoarder) traded most of the day down, showing a slight gain at the end of the day. The following image is static, if I did it right.


      The rise represents desperation, not any trend. Gold is going to continue going down. The amount of money circulating that can be spent on gold, supposedly or otherwise, to preserve wealth, is rapidly diminishing. That’s what deflation means.

      Take away the few remaining Chinese and the Indian buyers, and gold is going to drop in a very big way, further infuriating the already furious Chinese aspirants to their happy-faced middle class.

      The world’s markets are ultimately ruled by the credit shell game. And they are very easily manipulated (because of the deflationary threat inherent to the credit game) by those who control the money printing. Audit the fed? Yeah, right!

      Now, ask yourself. How many Yuan do you have tucked under your mattress? That’s right. None. You do not even have any EUROs stashed away. That’s why the reserve currency status of the dollar has never been more firm. It’s because just like the classical bi-metal problem in economics, there can really only be one reserve currency.

      Historically when sovereign governments have made it illegal to possess or trade in American dollars, the value of the dollar in those economies has skyrocketed. That is what we are seeing happen today, worldwide. Devaluation of currencies is making the dollar more sought after, even while sovereign governments are increasingly making it illegal to hold dollars.

      And China is even making it illegal to hold commodities, that can easily be converted into dollars. Look at Dr. Copper.

      Bring on the future. It’s going to be really ugly. But it’s also going to be thoroughly American. Position yourself wisely. Now is the time to rent, not buy. Property tax increases have made and will continue to make U.S. real estate essentially worthless, even worse than worthless. We all know that.

      Governments are taxing everything doubly and triply. If you can make cash, conserve it, and put it in the bank. Even at negative interest rates, if and when they reach the rest of us, you’ll do better there, in the bank, than if you buy something that can be taxed.

      Government even wants to tax dope. Now there’s a movement that will surely shape the future. More dope for the kids so the government can reap the tax upon it. Welcome to Colorado.

      • bo says:

        Great comment Don, but I don’t understand this:

        “How much will gold be worth, when the Chinese and the Indians, like the Greeks and the Italians, have less money to spend on the yellow metal?”

        What about the gazillions dollars QE programs? I don’t think Indian demand is a decisive factor. Western buyers will be.

  5. Vespa P200E says:

    Ah the fleeting maxim of field of dreams – “build it (AKA ghost towns in the middle of Chinese desert) and they will come” succumbs to supply and demand?

    Housing speculation in China represents store of value of sort and thus there are countless empty unoccupied flats all over China since flats in China are sold literally bare bottom unfinished inside the unit. Not even toilet, finished interior walls, light fixtures, room doors, kitchen cabinet/sink, etc., in other words not rentable. Besides most workers in major cities cannot afford the flats anyway. Local governments made a killing selling repossessed land along with the developers until the gross oversupply finally caught up with demand not to mention greater fool theory and voila prices adjust downward.

    Hope they exit in an orderly manner (no Chinese fire drills)!

  6. NotSoSure says:

    Basically either:
    1. We are going to be really rich.
    2. Or we’ll see hell.

  7. SteveK9 says:

    ‘China has long frustrated the hard-landing watchers – or any-landing watchers, for that matter’

    And probably will continue to do so. Try Yukon Huang:


    ‘ …. global stimulus – from negative interest rates to big bouts of QE … ‘

    In the face of a collapse in demand that is not ‘stimulus’ … government spending is. How long do we have to do this experiment? The results are in … low interest, QE does very little to nothing. Government deficits would have cured this quickly, as they did in China … the only country not afflicted with neoliberal nonsense.

  8. Julian the Apostate says:

    I found Don’s logic a bit questionable. If I understand him right, he believes that King Dollar will be the store of value. It is now, for the moment, because it is the world’s reserve currency and possesses a certain inertia from those long ago days when “the full faith and credit of the U.S. treasury” actually MEANT something. It will be, until it isn’t. I am not stacking coins to resell for fiat money. I am stacking it AS MONEY when everyone is burning their trillion dollar banknotes with the Looter-in-Chief’s picture on it to stay warm. However, if it’s digital in the increasingly hinky banking system you won’t be able use it even for that. One of us is right and the other wrong. Reality will be the final arbiter.

  9. Petunia says:

    As someone with a technical background I think anything that supplies the technology base will become valuable and those things that don’t won’t. Gold has very limited use in the technology field. Silver is far more relevant. I would be bias in favor of anything tech. As far as digital currency, I think Bitcoin is a scam, but it has brought the topic to the forefront. Eventually a digital currency will emerge and it will have value because people use it. The thing about digital currency is that it can be replicated by many issuers and will be. We might be holding baskets of digital currencies from different issuers all over the world. Apple now has Apple Pay and the country of Ecuador also has its own digital currency. You might have a problem with the concept but there isn’t a twenty year old in the world who does. The future is here.

  10. Ronald Reece says:

    I think Don Robertson is making a good point. It’s going to be “King Dollar” for a few years more if global deflation takes hold..

    Recall that global commodities are priced in dollars. As the USD declined over the past 30 years (The DXY was at 160 back in 1982), commodity prices have shined as a hedge against that falling dollar..

    But as with trying to push a beach ball ever deeper underwater, when it is let loose (deflation) that ball is going to rocket above the surface (“fair” value for the USD)..

    The BIS warned that there is a $9 Trillion “carry trade” in the Dollar out there that is being unwound. This is one of the reasons for the dramatic appreciation for the dollar and the drop in gold, silver, oil, copper.. etc, etc.

    One PnF chart for the DXY (currently at 95+) gives us a short term target of 120, and a likely price objective of 128.. That’s a 25%+ increase that still remains in the USD versus other major currencies..


    NOW.. when Gold starts trending upward along with the USD, THEN we may be seeing the ultimate flight to quality and signs of the Dollar collapsing as the final falling domino.

    Of course, if there is a major global conflict, then all bets are off, as the supply/demand equation will be significantly altered..

    And I don’t discount the potential for just such a war..

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