How Long Can Urbanization and Rising Leverage Lift Home Prices

Li Xunlei:

I wrote an article that the current price rise is mainly a monetary phenomenon, and before 2010 it was mainly a demographic phenomena. Logic is that in 2010 the number of Chinese migrant workers hit a new record high of 12 million, indicating that 2010 is the year of the largest migrant population, and also the 16-64 year-old working-age population, the highest proportion of the year, and also in 2010 real estate development and investment growth reached 33% , the historical peak. In 2011, the number of migrant workers and new working-age population started declining, real estate development and investment growth also turned down, at the same time, GDP growth has also seen a continued decline, which suggests that after 2010 the factors supporting prices, notably the money supply, its expansion rate is much faster than GDP growth.

Second-tier cities are still seeing a positive population inflow though:

Although prices rose mainly as a monetary phenomenon, but the population migration stimulating effect on prices persists, despite China's urbanization process has reached a late stage, but the urbanization rate is not high, four-tier cities to second-tier cities migration the process is far from over. Meanwhile, a second-tier cities to get more internal public service resources, there is also the city's urbanization and residence reselection process, so that the housing demand continues to climb.

He goes on to give some examples from Tianjin and Chongqing:

For example, from 2010 to 2015 in five years, Tianjin resident population increased by 19.6%, but the country's total population increased by only 3.1%, indicating that in the case of the country's population growth is slowing, the net population growth rate reached 16.5 Tianjin %. Again, Henan Province, the resident population in 2010 - almost no increase in five years in 2015, increasing the relative proportion of the total population, the net growth rate is actually negative 3%, but as the capital city of Zhengzhou, an increase over the same period a population of about 10 %about. Many central province of net population outflow and net capital inflow of urban population, Jiangxi, Anhui and other provinces have similar situations. This is called the big city phenomenon. However, as the population of cities and strictly controls the human population leads to slower growth or even negative growth. Therefore, the current cities is mainly reflected in the second-tier cities.

As the city's agricultural population urbanization, China is relatively unique phenomenon that Chinese cities are mostly set by administrative divisions, such as the large size of the agricultural population in Chongqing, so the resident population of more than Shanghai, its urbanization rate is far lower than in Shanghai, it itself exists to improve the process of urbanization. Further, since the second-tier cities in education, health care and other public resources, although not as good as first-tier cities, but far better than the four-tier cities, this kind of public service resources are unevenly distributed in the status quo, but also lead to second-tier cities and second-tier cities foreign population increase internal population is concentrated to a public resource-rich region. The typical case is a sharp rise in housing prices in the school district.

In contrast, the population growth of cities has been slowing down, this is the state policy restricted the inflow of large urban population results, such as Shanghai last year, there have been negative population growth. Thus, the first-tier cities housing prices, but also embodied in a monetary phenomenon that residents purchase Canadian leveraged; second-tier cities is a monetary phenomenon and demographic phenomena both.

Rising money supply is also lifting prices with 60 percent growth in mortgages:

May data from the credit point of view, long-term loans to residents (the vast majority of mortgages) high growth, is about 500 billion, which makes the former residents of five months to reach about 1.8 trillion new loans, June is credit data has not been introduced, it is estimated the first half of the new mortgages will be more than 2 trillion, an increase of 60% over last year, if this year to reach 4 trillion of new loans, the mortgage balance residents reached 20 trillion, although total look amount is not high, but the excessive increase reflects residents' investment in real estate leverage ratio increased dramatically.

Rising population growth rate mortgage from the beginning of 2013, corresponding to that in 2013 commercial housing sales area of 1.3 billion square meters, reaching record highs, which also confirms me before that "after 2010, housing prices in major embodied monetary phenomenon "conclusion. This reflects a high economic dependence on China monetary expansion, on the other hand, the purchase has become the main means of dealing with the currency issued.

Government policies are likely to reduce leverage in the second half:

The problem is that, despite high inventory areas to encourage buyers, but still does not change the current situation of high inventory; Real Estate Popular cities despite low inventories, but the overall look is still in residents purchase add leverage. Therefore, it can not simply be interpreted in accordance with policy guidance that policy objectives can be successfully achieved, will depend on changes in sales and marketing structure. The estimated total sales in the second half will still maintain residential upward trend, despite the national shortage of residential areas will be the introduction of regulatory policy, but the trend will continue for the real estate structural differentiation, which is due to the Chinese cities of the process has not been completed. Therefore, we can expect the introduction of regulatory policies will make residents purchase will add leverage "rational down."

Due to hihg leverage and high real estate prices, however, mortgages will go from quality to NPLs:

Mortgage loans will eventually go from quality to poor quality loans

In the course of the economic downturn, the bank's NPL ratio is also rising rapidly, therefore, the major banks have been offering preferential measures to fight resident mortgage, because mortgage rates have become the lowest non-performing loans. But not a good thing once and for all the world, the United States subprime mortgage crisis is a resident of default triggered. In the past, Wenzhou underground banks bad debt rate has been much lower than the bank's bad debt rate, everyone says that the private sector credit, and now, private financial default event of frequent, high rate of adverse issues such as small loan companies, but also fully demonstrates no hard and fast things . So, when the time housing prices, mortgage loans of course, is high, like when GDP growth rate upward, when banks are competing for high-growth companies to lend the same.

I remember the beginning of last year, I have to be a map: Compare mortgage balance of Chinese and American homeowners, we found that China mortgages accounted for only about 10% of total value of residential real estate, the US subprime mortgage crisis, it was 55%, now about 40%. Therefore, from the beginning of last year to see, even static, China's mortgages are safe, and even if house prices fall, mortgages will not bring banks much impact. However, this refers to the mortgage in the past years so the smaller size of the stock, the risk for so many years as housing prices continued to rise, has been far been covered. The problem is that the size of the incremental mortgage surge of concern, if additional 4 trillion this year, this new part of the year, equivalent to 25% of the balance of history, this 4 trillion is the risk has not been completely covered up.

This is the case with all credit bubbles, the largest and worst quality loans are made at the end.
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