China Real Estate Pain Begins as Credit Growth Slows

Financing is tightening for the real estate sector.

iFeng: 楼市资金面趋紧 全国房价涨幅或继续下行
"Real estate as a capital-intensive industry, with a strong dependence on capital, changes in the financial side will directly affect the real estate market." Yesterday, Lai Yi Ju researcher Qin said in an interview with reporters this year , with the deepening of the pace of adjustment of the property market, the property market funds face is clearly showing a tight situation.

From the point of view of buyers lever residents, according to 2017 third quarter financial institutions to invest in the central bank recently released statistics report shows that, as of the end of September, individual housing loans 21.1 trillion yuan, an increase of 26.2%, respectively, from the previous quarter and the same period last year down 4.6 and 7.20 percentage points. In fact, since this year, year on year growth rate of individual housing loans have been introduced to the downstream channel.
Credit bubbles are unsustainable because they require an ever rising rate of credit growth. In order to grow a credit bubble, you need to grow the amount of credit. As the credit bubble inflates, credit is an increasing share of growth. It's like pushing up a ball with a stream of water. The end is always a collapse in asset values or hyperinflation.

Say the economy is 100 and outstanding credit is 200. The economy grows 10 percent, credit 30 percent.
At the end of year 1, the economy is 110 and credit is 260. Total demand is 110 + 60 (new credit) = 170
At the end of year 2, the economy is 121 and credit is 338. Total demand is 121 + 78 = 199, up 17.1 percent.
At the end of year 3, the economy is 133 and credit is 439. Total demand is 133 + 101 = 234, up 17.5 percent.
At the end of year 4, the economy is 146 and credit is 571. Total demand is 146 + 132 = 278, up 18.8 percent.

Credit growth slows to 15 percent in year 5.
At the end of year 5, the economy is 161 and credit is 657. Total demand is 161 + 86 = 247, down 11.3 percent.

Even without assuming any negative effects from credit growth, a slowdown in credit growth will trigger a significant slowdown in economic growth or asset values in the target market. It's math. If you assume rising credit levels requires rising debt service costs, rising credit growth is needed to finance interest payments (Ponzi finance).

Rising interest rates don't help.

Bloomberg: China Corporate Bond Investors' Luck May Be About to Run Out
“It’s very likely we will see a significant increase in corporate yields in the coming year,” said David Qu, a market economist at Australia & New Zealand Banking Group Ltd. in Shanghai. “The trigger could be tougher regulations or a default. A majority of non-bank financial institutions’ debt holdings are corporate bonds, so their selloff can lead to severe consequences. Banks are underestimating authorities’ intentions to tighten regulations.”

Signs of a turnaround are already beginning to show, with the yield on three-year AAA notes -- the most common grading for Chinese corporate debt -- rising 8 basis points, the most since May, to 4.90 percent on Monday. That extends the cost’s increase this month to 29 basis points to the highest level in five months. The spread between those notes and government debt has climbed in October and was last at 117 basis points, though it’s still a long way from this year’s peak of 150 basis points in April.
FT: China bond yields down from 3-year high after PBoC cash injection
Contributing to expectations of tighter policy are signs of inflationary pressure and resilient economic growth in China as well as rising global rates on the Fed’s more hawkish outlook. In China, both consumer and producer prices rose faster than expectations in October, underpinned by rising coal and steel prices.

“We expect the reflation trend to continue. Along with a moderately higher global rate environment, this means that domestic interest rates will also trend higher,” wrote Li Cui, head of macro research at CCB International in Hong Kong.
Reflation is going to crater the housing market.

iFeng: 调控之下楼市降温明显 房子1.8万跌到1.2万无人买
Under the regulation, the most severe real estate Central Beijing property market has finally dropped! Institute research found that the chain of home in Central Beijing area: Compared with the March 2017 high of September Yanjiao chain of second-hand housing turnover fell 90%, the average price fell 26.9%. Homelink has revealed the above information, the display area Central Beijing property market slump.

Yanjiao down a little deal, Xianghe from the end of May to the chain of home on a deal now 5 sets, there is no market price! A netizen said that there is room in Central Beijing, before a lot of friends in Central Beijing basically a suite, house prices rose last year results were in a turmoil, plus a variety of levers, all kinds of various loans to buy! In April this year after the results, all the quilt, Xianghe has dropped to 12,000 from 18,000, not sell!
In a speculative market, the supply and demand curve slopes upward. The higher the price, the higher the demand. The lower the price, the lower the demand. Back to the credit example above, a slowdown in credit growth leads to a drop in home prices, thus reducing demand. Every slowdown in credit becomes a crisis. Each time the can is kicked, more credit is needed to restart growth. The system must scale up. The next crisis will be larger. On and on, until the music stops. Or the system is "bailed out" by a massive debasement in the currency.

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