Bill Poulos is a seasoned investor, financial educator, and philanthropist. Bill has been trading in the markets since the early 1970’s. Poulos is the president and cofounder of Profits Run, Inc. He is the author of Bill Poulos’s Simple Options Trading for Beginners: How to trade options from A to Z explained in plain English. Bill stays abreast of current hot topics and trends in the market and contributes to Investing. He honored Veterans this week with a reminder of why we celebrate the federal holiday.
A week ago Bloomberg came out with a shocking statistic. About 50 Million homes, totaling roughly 22% of China’s residential properties, are empty. Professor Gan Li, the researcher behind the information, was stunned. He said it’s the highest he’s ever seen and far outstrips vacancy rates throughout the rest of the world.
“There’s no other single country with such a high vacancy rate,” said Gan Li. “Should any crack emerge in the property market, the homes to be offloaded will hit China like a flood.”
The situation would be slightly less dire if there were buyers ready to purchase these homes but, with real estate prices being what they are, no average citizen can afford to buy them. Those who do have the capital to invest in a home are purchasing new ones, leaving China in its current predicament.
The cost of housing in China has peaked with historical highs, resulting in existing homeowners being the only one who can afford to buy. That’s right, the only people who can afford to buy don’t even need to. In today’s China, more than 70% of new homes purchased are by families who already own one.
How does the massive number of vacancies affect this?
The author of The Great Housing Boom of China, Kaiji Chen says, “There’s an economic cost to vacancies too because they’re a drag on supply, which puts upward pressure on prices and crowds young buyers out of the market.”
Families that didn’t get in on the ground floor of the housing boom might still be able to now, but it would involve taking on a large amount of debt. And it is no small task trying to finance a home in modern day China. Outstanding mortgage loans have increased by 700% in China in the past ten years.
Trouble on China’s Horizon: Is a Mass Housing Sell-Off Inevitable?
The panicked dumping of real estate has yet to come to pass, but there is an ever present, growing fear that China cannot keep the market afloat much longer.
Bloomberg reports:
The nightmare scenario for policymakers is that owners of unoccupied dwellings rush to sell if cracks start appearing in the property market, causing prices to spiral. The latest data, from a survey in 2017, also suggests Beijing’s efforts to curb property speculation — considered by leaders a key threat to financial and social stability — are coming up short.
The big question is, how on earth has China managed to keep stable housing prices as long as they have? The answer? Debt. The Chinese government has been single-handedly keeping things stable by purchasing as much surplus inventory as they can from home builders, maintaining China’s booming economy. And we thought our bailouts were bad.
In the meantime, the Wall Street Journal reports that 200 cities across China have been purchasing excess apartments in the hopes of moving the impoverished into them. This is a program that began in 2014 and has been pushed out to 2020 thanks to support from government bank lenders.
This method has done a lot to maintain the current façade of stability in the housing market, but it also begs the question: how much debt does China have?
Head to Head: China v. U.S
China is balancing on the edge of a knife and, should the housing market fall, their entire economy could come tumbling down. Thirty percent of the Chinese GDP is made up of real estate accounts.
In addition, the Chinese middle class – which didn’t exist 15 years ago – has the majority of its capital bound to real estate. Statistics would suggest as much as 75% of that wealth came from the 2014 housing boom, with the number only growing over time.
To say that America’s wealth is spent elsewhere would be a vast understatement. Only 24% of middle-class wealth is invested in real estate by comparison, which equates to $107 trillion.
One of the bigger differences between Chinese and American housing markets is its debt. We all remember the mortgage crisis that carried on from 2007-2009. Trillions of dollars in loans, good and bad, came crashing down. That may seem like a bad thing, but we needed to burst that housing bubble to recover to the point we are at today. For better or worse, China hasn’t gone through that process of healing, electing instead to keep their bubble.
Nothing lasts forever and when China’s housing bubble inevitably bursts, the world will be watching to see just how far the Chinese ripples will spread.