China's Housing Bubble Bigger Than Japan's

Guan Zhixiong of Nomura says China is unlikely to repeat Japan's policy mistakes, but the real estate bubble will burst.

中国楼市泡沫大于日本 房价下半年或出现负值
Chinese real estate market has reached bubble status

I think housing prices in major Chinese cities has far exceeded the equilibrium level, and is not sustainable, and thus can be called a bubble state. There are two indicators can verify my point. Price earnings ratio is an indicator of major cities. Last year, Beijing's price earnings ratio of about 19 ​​times, Shanghai, Shenzhen has more than 17 times. In other words, a family now eat or drink in Beijing, also requires 19 years of income to buy an average area of housing. This is even higher than the 20th century, the 1980s [ News Price apartment review ] the second half of the bubble level in Tokyo.

Another indicator is the rent in major cities (Annualized) Rate ratio. In the major cities in China are probably around 2.0% -2.5%. Compared with the deposit rate (the upper limit of 3.3% a year) and the lending rate (one-year 6.0%), which is a very low level. If the price does not rise, then go buy a house rental profit and worthwhile.

Residential prices in the future in the end is up or down? To answer this question, we can look at housing sales price index of leading that change in sales area. Sales area (up) on housing prices (up) probably between six months to a year ahead. After the sales area compared to last year in January to February reached a peak in the beginning of a significant decline since the beginning of the year has become negative. Also catch up with the sales price at the end of last year reached a peak and then begin to decline. It would appear that housing prices will continue to fall year on year, and a negative in the second half of this year or early next year.

Affect the real estate market adjustment on China's economy

The housing market has entered a period of adjustment, China's economy will suffer consequent What impact? Yes, the real economy from the financial analysis of three aspects of finance. From the economic entity perspective, last year, real estate development and investment of up to 8.6 trillion yuan, equivalent to 15.1% GDP in; crude steel production was 780 million tons, accounting for about half of the world, the housing market downturn will lead to a decline in steel production. The iron and steel industry and includes overseas iron ore correlation, energy, shipbuilding and other industries, etc., is very high, so its effects are not confined to spread in China, will also affect the global economic situation.

From the financial side, real estate taxes, and as an important source of revenue for local land premium is equivalent to a total of about 10% GDP. Housing market downturn will give local governments finance especially great pressure. Thus China will not be able to re-scale as in the past of public infrastructure investment.

From the analysis of the financial sector, in 2013 real estate loans of financial institutions is more than 14 trillion. Fortunately, in 2010, after China has taken some measures to squeeze the bubble, including the upgrading of the mortgage ratio of the first payment. Since the housing down payment ratio is currently 30%, higher proportion of houses for investment purposes, the third suite can not even loans. Therefore, even if real estate prices fell 30 percent, the bank still has sufficient buffer space.

China will not enter the "lost two decades"

After the second half of the 1980s in Japan and now China, faces shortage of labor and its potential growth rate resulted in a substantial decline, but the government attempted to proactive fiscal policy and monetary policy to achieve economic growth rates over the potential growth rate The result triggered a bubble.

Well, now China's potential growth rate in the end how much is it? This relationship (job vacancies and job seekers ratio) between find some clues by looking at China's real economic growth and the opening rate in urban areas. Until 2009, there is a strong linkage between these two variables, but after that, it was an enormous difference. Now economic growth has fallen to 7.4%, but it increased significantly to ask for a multiple of 1.1 times. This means that China's potential growth rate may now have less than 7.4%, perhaps closer to 7% instead of 8% level up. Of course, the recent Chinese government also recognized, as in the past can no longer pursue high growth. Can not be denied that the four trillion stimulus policies implemented after the world financial crisis had brought the foam increasingly serious sequelae.

Monetary authorities in order to prevent a significant increase in rates of foreign exchange intervention on a large scale, resulting in a liquidity expansion. One reason for Japan's bubble economy is accompanied by September 1985 "Plaza Accord" from the yen appreciation. But it is not so accurate, the yen appreciation is not a bubble, but the authorities in order to correct the excessive appreciation of the yen and a large amount of currency intervention relaxed monetary policy, resulting in a situation of excess liquidity. Now China's foreign exchange reserves are still increasing, the authorities have not intervened to stop the foreign exchange market, thrown yuan, buy dollars, which makes it difficult to control the quantity of money.

Now the Chinese economy and the situation in Japan that year there is a resemblance, in addition to the bank to deposit-based lending, there was the phenomenon of the so-called shadow banking. In Japan, when the specialized housing finance companies to raise a lot of money to invest in the real estate market, with the Bank of China is similar to (2.59, 0.00, 0.00%) of the sales of financial products and trust products sold by the trust.

In addition, the rise in house prices and relatively stable prices also similarities. From the point of view of inflation, with time, like Japan, China now is to maintain stable prices overall, which is exactly the authorities did not take earlier tightening monetary policy for a reason.

China's current economic situation and the situation in Japan, there are many different year.

First, the degree of reliance on real estate transactions for the bank's different. After the second half of the 1980s, Japan's bubble economy period, even if not the mortgage, the bank construction, real estate and non-banking financial institutions (including specialized housing finance companies) Loans three real estate-related investment has reached about 25% of total loans . And China is now facing the real estate loans, even including for personal mortgage is included, it accounts for only about 20% of China's total bank loans.

Secondly, the relationship between the bank and the balance sheet shadow banking differentiated between. In Japan's bubble economy period, specifically on housing finance company loans are, so if you can not recover, then it becomes the bank's bad debts in the table. Since this exceeds the bank's own ability, and ultimately through the injection of public funds to solve the problem. But in China, most of the financial products do not belong to the lending bank statement, so even if the event of default, in principle, the banks have no obligation to compensate customers.

Again, the bank's ownership structure is not the same. Japan was the vast majority of banks are private banks, while China's commercial banks (including the already listed) is still mostly government-controlled. Therefore, confidence in the banking system will be higher, and even problems, the government will inject through other ways to support.

In addition, the degree of exchange rate regimes and capital controls are also different. In the bubble era, Japan has implemented a floating exchange rate system, and essentially no restrictions on capital flows; while the People's Bank of China is still on the exchange rate is controlled, and for liquidity also strictly limited. This practice helps to prevent crash like 1997 baht that happen.

More importantly, there is a large gap between the two sides on the level of development. Japan was already a mature countries, but China is still less than $ 7,000 per capita GDP in middle-income countries, if we can make good use of the advantage, then, in the future also be able to maintain growth of around 6% -7%.

In general, these differences have provided favorable conditions for the Chinese to prevent the bubble burst may lead to long-term economic crisis and economic downturn. In the short term, China faces adjustment is inevitable. However, China is not like Japan will enter the "lost two decades" mean? I think this possibility is relatively small.

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