Affordable Housing Institute : US

You can’t boom an economy without breaking vases?

 

If capital is global – and it is – then, in the words of a Miami Vice villain, “When we sneeze?  Everybody — catches cold,” and no other nation has more invested, financially and otherwise, in the US economy’s health, than China.  And, if Forbes [September] is to be believed [Usual don't-believe-everything-you-read-in-the-paper warnings apply – Ed.], the crumple has already started:

 

We ran into a little problem

 

If you’re looking for good deals on housing, check out China.  The country may be entering a period depressingly familiar to Americans

 

The sales hall at the Oasis housing development welcomes customers with multicolored streamers, water fountains and marble floors. Sales agents announce that only a few units are available from the first two phases of the project and that 70 of the 130 or more buildings are almost completed. But a few hundred feet behind the sales hall some of the “almost completed” buildings look like neglected, hulking shells.

 

Houses need occupants like human beings need oxygen.  Look at the lifelessness of a vacant property and it would make one believe in a soul like a ghost whose spirit departs the body.

 

Maybe I can breathe life into them

 

Construction workers idling nearby say they haven’t been paid in five months. Prices have been slashed from $95 per square foot to $55. Market experts estimate that as few as 300 units have been sold out of the first 2,000 put up for sale.

 

For any large development, the interval from completion through occupancy – whether rental or ownership – is its most vulnerable time.  Like a show jumper clearing a fence, a property leasing up or selling out has a fluid grace when it succeeds, and crashes in confusion when it doesn’t.

 

Let’s try that sellout plan again, okay?

 

A property that’s 15% sold isn’t jumping, it’s thrown its rider.

 

Sounds like another sad-sack Florida condo development, yet this scene is in the northern Chinese industrial city of Shenyang. Over the last five years real estate prices in China, in dollar terms, doubled on average to $50 per square foot and the country added 20 billion square feet of new residential property. But the once seemingly limitless real estate boom is going into reverse.

 

I think it’s time for us to back up

 

In fact, the decline is already rapid:

 

Home sales dropped by half in June from a year earlier in Shanghai, Shenzhen, Guangzhou, Chongqing and Chengdu, according to data compiled by JPMorgan. Conditions are worst in southern China, where undeveloped parcels are going unsold and home prices are expected to continue falling despite a drop of 40% from last autumn in some neighborhoods. Now the market malaise appears to be spreading northward. If not for an Olympic boost, Beijing’s market would be weak, too. “We’re entering a bust now,” insists Andy Xie, an Asia economist and bear on Chinese property.

 

This is your economy after a credit crunch

 

Certainly the Chinese government thinks so, as shown by the massive stimulus package it announced in early November.  As reported [November 9] in Yahoo Finance:

 

China unveils $586 billion stimulus plan to fight effects of global meltdown

 

BEIJING (AP) — China unveiled a $586 billion stimulus package Sunday in its biggest move to inoculate the world’s fourth-largest economy against the global financial crisis.

 

Does anyone other than me have the sense that finance ministers are playing “my bailout’s bigger than yours”?  The $586b figure, at any rate, is not well spelled out and may include a repackaging or refreshment of previously committed funds:

 

The Cabinet approved a plan to invest the money in infrastructure and social welfare by the end of 2010, a statement on the government’s Web site said.

 

Some of the money will come from the private sector.

 

A curious formulation; if coerced from the government, then it’s not really private; and if it’s from the private sector, then how can the Chinese government claim credit for it?

 

It’s easy enough for me to see how!

 

The statement did not say how much of the spending is on new projects and how much is for ventures already in the pipeline that will be speeded up.

 

The same way, I suppose, that the government can re-label existing spending and present it as new.

 

China’s export-driven economy is starting to feel the pinch of weakening U.S. and European economies, and the government has already cut key interest rates three times in less than two months in a bid to spur economic expansion.

 

As I’ve written in Recap’s State of the Market 11, The Pileup in Slow Motion, de-leveraging occurs across all asset classes or not at all, and as chronicled in State of the Market 13, Happy Thanksgiving, 2009!, this process is sequential and lengthy.  Exporting nations are no more immune than importers – arguably they’re more dependent, since their income derives from getting us to pay high prices that we can afford only so long as credit is generous and interest rates are low.

 

Economic growth slowed to 9% in the third quarter, the lowest level in five years and a sharp decline from last year’s 11.9%.

 

Most of the world would think 9% annualized economic growth cause for wild celebration.

 

9% growth!

 

For China, which is racing to catch up from the Great Leap Backward and the Cultural Devolution, it’s a slowdown.

 

That is considered dangerously slow for a government that needs to create jobs for millions of new workers who enter the economy every year and to satisfy a public that has come to expect steadily rising incomes.

 

Another way of viewing the same problem is that in terms of a recession it’s not the rate of growth per se but rather the total illiquid assets in the development pipeline.  As the Forbes piece shows, China went hog-wild in development, with lending practices that would make Angelo Mozilo’s hair stand on end:

 

What loan-to-value ratios?

 

Last year the People’s Bank of China toughened the requirements for non-first-home mortgages, punishing speculators and the builders who were selling to them. (First-home mortgages became easy to get this decade and have stayed that way, and until recently rising prices shielded borrowers from the unfamiliar nightmare of negative equity.)

 

China, with its hyperactive real estate markets, took staggering percentages of its newfound dollar wealth and plowed them into high-rises and cranes — unfinished assets whose value will not be liquid again until they are complete and occupied.

 

Exports have been growing at an annual rate of more than 20% but analysts expect that may fall as low as zero in coming months as global demand weakens.

 

Exports bring cash.  For China, a world short of cash could be a catastrophe in their development pipeline.  It’s already bludgeoned their equity prices:

 

Many publicly traded property companies have lost more than two-thirds of their market value since their fall 2007 peaks, initial public offerings have been put off, and companies that indulged in fevered land-buying sprees now find themselves overextended and thirsting for cash. The developer of that 23-million-square-foot Oasis project, Hengda Real Estate Group, known in English as Evergrande, aborted a $2.1 billion initial public offering at the last minute earlier this year.

 

IPO’s also provide cash.  Busted IPO’s are a warning signal.

 

Warning, great Depression ahead

 

Saddled with a reported $1.5 billion in debt to banks, Hengda instead had to drum up $500 million in financing in June from Merrill Lynch, Deutsche Bank and other investors. The company insists that its operations are normal but declines to provide numbers.

 

All our operations are normal

 

China’s statement said the Cabinet, at a meeting chaired by Premier Wen Jiabao, had “decided to adopt active fiscal policy and moderately easy monetary policies.”

 

The statement said the spending would focus on 10 areas. They included picking up the pace of spending on low-cost housing — an urgent need in many parts of the country — as well as increased spending on rural infrastructure.

 

China has a massive affordable-housing problem exacerbated by the long-delayed migration of rural Chinese into the cities; that, in turn, is a function of China’s antiquated land use and land resale policies.  The Chinese claim to be liberalizing owners’ ability to sell agricultural land, but some observers I’ve read think the reforms are mainly optical, not substantive.

 

We’ve put it back together

 

The statement said rural and urban incomes would be increased.

 

By printing money?

 

This is your economy after stimulus?

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