Opium to housing – the journey of China
In early 19th century the addiction of tens of millions of
Chinese to opium was one of the biggest disasters ever to hit China, eventually
leading to what is popularly known as the “century of humiliation”.
A recent Bloomberg report
suggests that new disaster which could be of similar magnitude might be
developing in China. It refers to it as “housing slavery”. The gist of the
report is as follows:
The Chinese housing bubble is now the biggest it has ever been;
according to some it is even bigger on a relative basis compared to the US
housing bubble (either in 2007 or 2013).
The Chinese housing bubble is now the biggest it has ever been;
according to some it is even bigger on a relative basis compared to the US
housing bubble (either in 2007 or 2013).
The shift to private home ownership stems from reforms started
in 1998, when then Premier Zhu Rongji privatized state- owned housing provided
at low rents to urbanites, transferring home ownership from the government to
the families occupying the dwellings. About 230 million people moved to cities
in the 2000- 2011 period, the biggest urbanization in history.
Today about 50 percent to 70 percent of home buyers in the
first-tier cities of Shanghai, Beijing and Guangzhou use mortgages. Average
per-square-meter prices in 100 cities tracked by SouFun are five times average
monthly disposable incomes. A 100- square-meter (1,076-square-foot) apartment
today costs about 40 years’ annual income, according to SouFun and government
data, even as salaries have more than quadrupled since 1998.
Chinese homebuyers typically use 30 percent to 50 percent of
their monthly incomes to repay mortgages, The “general guideline” among Chinese
banks is that a borrower’s salary should be at least twice their monthly
payment
Given the situation, China can hardly afford a real estate
bubble pop as it would make the millions of debt slaves into millions of far
poorer, deleveraging and in many cases, broke, debt slaves, and lead to the
downfall of the financial system stuck holding mortgages that no longer
generate cash flows. On the other hand, inflation is already resurgent, and as
the recent halt to reverse repos shows, China is this close to a repeat of the
spring of 2011, when it lost control of inflation, and had to demand that
global central banks end their reflation effort for fears what hot money flows
would do to its social stability.
Worst of all, however, is that in the pursuit of the great
Chinese dream, more and more housing slaves will emerge, beholden to an
insolvent system reliant on constantly creating over $100 billion in new
liabilities (i.e., deposits) per month. Anything more than that, and you have
hyperinflation; anything below that and you have a housing crash. And since
Goldilocks only works for so long, when the PBOC finally veers off course, it
will be the "Sherries" in China left holding the bag. A very empty
bag.
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