Chinese Real Estate Sector Has Turned, Economy to Follow

An article from the China Finance 40 Forum covering China's real estate market has lots of good charts. The second one below is the most important. It shows real estate investment as a share of GDP, falling and then picking up. In 2015, real estate investment slowed to 1 percent and in 2016, it is slowing a again, down to 5.3 percent YTD. Real estate investment grew faster than GDP at the start of 2016 though, to reach its highest share of GDP since 2013. This propped up Chinese GDP in the first half, but a downturn is already underway.
This next chart shows the turn in sales growth and then price (dotted line, NBS 70-city survey) clearly. The second shows real estate area under construction and prices (dotted line, NBS 70-city survey).
This chart shows the Chinese real estate cycle. A decline in prices should begin in the next month or two, followed by a drop in investment. Real estate investment fell to 1.4 percent growth in July 2016 and the slowdown hasn't even really begun yet.
And former three different cycles, 2015 to start sales and housing prices do not rise quickly bring new construction area. Until the end of 2015, new construction area is still negative growth year on year, real estate development and investment amount are at historic lows.

This is partly due to the country's overall housing stock market is still in the accumulation of business prospects for the real estate industry to determine differences, on the other hand is due to lack of developer's own investment capacity.

By the end of 2015 the real estate industry, the average asset-liability ratio of 70%, far higher than other industries. Excessive leverage at developers make operating conditions more difficult in the market downturn. The real estate industry average ROE of 8% in 2010 fell to 5% in 2015, interest coverage fell from 4 to 2.5 times. Even after sales picked up in 2015, Days sales outstanding also largely used to repay debt rather than invest further.

Until the end of 2015, real estate companies listed on the current ratio and quick ratio have rebounded, showing short-term debt burden eased. 2016 first quarter real estate development funds grew 15%, ending two consecutive years of single-digit growth in real estate investment rebound quickly, the performance of new construction area in April cumulative increase of 21.4%, real estate development and investment in the amount of the cumulative increase of 7.2%.
Speaking of the relationship between credit and real estate:
As the real estate investment plays an important role in GDP growth, while real estate prices and rental costs will be passed to end enterprise thus affecting the overall price , thus creating a mutual feedback effects (Figure 7 between the real estate cycle and interest rates in the credit cycle shown). When monetary policy easing, buyers get a boost demand for new loans and rising sales area, within a few months of real estate investment and housing prices rose, led directly to GDP and is conducted to the overall price.

According to experience, the CPI within six months after the formation of the inflection point of monetary policy began to shift, interest rates (or interest rates) cycle lasts several months to a year (Figure 8). When the CPI upward for some time, monetary policy tightening, the incremental credit contraction, real estate sales and prices, real estate investment decline put pressure on economic growth, price slowdown (or even deflation), then trigger another round of currency policy easing. Overall, since 2006 behind the wheel of the real estate cycle is the credit cycle.
The message is a stark warning for China:
Summary and Outlook

After the export-led economic growth mode is terminated, the role of real estate investment in China's GDP growth in the increasingly prominent. The real estate cycle is driven by credit policy since 2008, including the total amount of the monetary policy and macro-prudential policies for the real estate. Although the short term do not see the CPI and monetary policy shift upward signs, but the downside is the interest rate has also been limited. Considering the skyrocketing housing prices in some cities and residents purchase loans surge, macro-prudential policy for the real estate market has clearly turned.

In the medium term, to the economic downturn and expected future revenue growth slowdown does not support a substantial increase in the household sector continued to leverage, which means increased demand for home loans is likely to have peaked.

Whether from the policy level or demand perspective, the real estate market turning point has come, the last two quarters of promoting economic stability factors will soon disappear. Real estate investment growth will slow or even negative growth in the fourth quarter and bring downward pressure on the economy next year.
iFeng: 机构:房地产市场拐点已经到来 投资增速或负增长

This was exactly the warning sent by Liaoning in 2014. It relied on real estate investment to drive economic growth following the commodities slowdown (which began in 2011), but once that market slowed too, it was game over. Liaoning Shows Path to Chinese Recession, Global Depression
There's nothing particularly special about Liaoning beyond its reliance on basic industries. Instead of a slowdown spread out nationally, it is concentrated in a few provinces. Yet in its use of real estate and government-led fixed asset investment, Liaoning is like most provinces. The same strategy is deployed all over China, it simply wasn't enough in Liaoning because the slowdown in the "real" economy was so great and so long, now running into its 5th year.

If I am wrong, then Liaoning is a special case of a long-term concentrated slowdown. Other provinces will not see a similar economic depression and will be able to paper over their recessions with real estate and fixed investment for a few years, by which time the economy will have recovered.

If I am correct and the slowdown works through the rest of the economy, many provinces will end up in a situation similar to Liaoning because fixed asset and real estate investment was the only play in the stimulus playbook since 2008. Provinces with more diversified economies can manage for a time, but eventually they too will see the core economy weaken and investment collapse.
We are months away from seeing the effects of the latest real estate slowdown and Liaoning sends a stark warning for any province relying on real estate to make up for real economic shortfalls. Once real estate investment declines, the bottom drops out:
The world is in the middle of a slow motion depression unfolding over years instead of months. There's no evidence any of the current trends are reversing. China's national real estate investment will eventually follow Liaoning and move into contraction, followed by fixed asset investment, followed by GDP. It could take another couple of years to unfold if the markets continue discounting the decline in global economic activity, but eventually the moment of realization arrives. The central bank created fog will lift, revealing the global economic depression.

Related posts on Liaoning.

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