The Secret to Soaring Home Prices in China
Haitong Securities Chief Economist Jiang Chao has a new report on the real estate market. He says national real estate prices are not rising faster than nominal GDP growth and therefore does not constitute a bubble. Rapidly rising local prices are a bubble though, and he says the rise in home prices since 2015 is a clear monetary phenomena driven by interbank deposits being counted as ordinary deposits starting in 2015, a way of boosting bank capital to increase lending. This is the secret behind the soaring prices in cities such as Beijing, Shanghai and Shenzhen, where financial companies congregate. Like all bubbles, this one will eventually burst too, and the air may already be coming out as deposit growth collapses. Luckily, he says, this is a structural (localized) bubble, not a comprehensive one, and warns the government to curtail liquidity before it becomes a national problem.
He’s erring on the optimistic side. As Ni Pengfei of CASS recently warned (see: CASS: Sharp Housing Correction Coming in September, Concentrated in Hot Cities), the top-tier cities act as market barometers. A sharp decline in Beijing, Shanghai and Shenzhen will have a psychological impact on the national housing market. The surge in mortgage lending and land sales is also responsible for stronger GDP growth in 2016. If this support fades, tighter monetary conditions and another ratchet down in GDP growth is on the way.
The report starts by looking at the U.S. housing market, where prices rise along with GDP most of the time. When growth exceeds nominal GDP, it’s either because prices are rallying back following a crash, or a crash is on the way.
If the real estate is seen as a financial asset, then its return is produced annually by the rent, and the rent from tenants and income, and income tenants from local businesses, thus theoretically price is determined by the local economy development of the decision, the price trend and should be economically relevant. Our statistics US new home sales over the past 50 years the average price of an average increase of 6%, while the United States over the past 50 years the average annual growth rate of nominal GDP also happens to be around 6%, roughly the same between the two. Home prices rise faster forms a bubble.
The annual increase prices from the United States point of view, but also highly consistent with the trend growth rate of nominal GDP. In the United States over the past 50 years, home prices rises far exceeding the nominal GDP growth rate appeared only four times, respectively, ’73-’74, ’87-’88, ’04-’05 and ’13-’14. In ’73-’74 and ’13-’14, these two time prices rose after house prices plummeted a few years earlier. The other two times house prices plummeted afterwards. In ’87-’88 house prices soared, later in the ’89 – led to the savings and loan crisis in 1990. After the ’04-’05 rise in house prices led to 2008, set off the subprime crisis in 2009, and swept the world.
While U.S. home prices tend to track nominal GDP very well, in China they do not.
China home prices have nothing to do with the economy.
In China, home prices and nominal GDP growth trend is not uniform. This one has two important meanings, one legend economic decisions housing prices in Chinese law does not apply. Chinese people to buy real estate is not based on good or bad economy or the level of rent. Nationally, there’s a limited degree of real estate bubble. Second, from 2005-2016, new home prices nationwide rose an average of 8.3%, GDP nominal growth rate of 13.4% over the same period, the country’s economic growth far exceeds the price gains over the same period, indicating that the real estate bubble from a national perspective is limited. From the Bureau of Statistics released 70 major cities housing prices, the rise in house prices over the past five years, mainly in Beijing, Shanghai and other cities and a handful of second-tier cities of Nanjing, Suzhou, Wuhan, and in second-tier cities such as Chengdu, Changsha, Chongqing, Xi’an and most other second- and third-tier cities, housing prices did not rise, it also means that the national real estate bubble is not so serious.
Chinese currency determines prices.
If the Chinese economy and home price movements unrelated, then in the end, what is it related to? We found that the real price trend in China is highly related to monetary indicators, both broad money M2 growth, or the growth rate of total deposits, and their movements are highly consistent with the national price movements. This means that China’s housing prices is mainly liquidity-driven rather than economic driven. Over the past 15 years, the fastest economic growth came in 2007, when the national GDP nominal growth rate was 23%, but the national house prices rose only 15%. In 2009 after the financial crisis, GDP nominal growth rate of only 9%, but the year National house prices rose 23%, a record the highest increase, from year 10 trillion of credit, deposit and year M2 growth rate up to 28%.
Beijing, Shenzhen and Shanghai Home Price Myth.
From the Chinese point of view of home price movements in the past, Beijing, Shenzhen and Shanghai housing prices led alternately, from 2015 onwards, Beijing, Shanghai’s housing prices rose again in the country house prices rose far more than the same period, Beijing, Shenzhen and Shanghai became a myth of forever rising prices. Beijing, Shenzhen and Shanghai prices rose far more than economic growth, it is a bubble.
First, we compared the Beijing–Shenzhen-Shanghai and their price gains and economic growth, both found almost independent. And from 2005 to 2016, Beijing, Shenzhen and Shanghai housing prices rose more than nominal economic growth, indicating that the city’s housing prices have been in a bubble. Beijing where average house prices rose 13.9%, while nominal GDP growth of 12.2% over the same period. Shanghai average house prices rose 12.3%, while nominal GDP growth of 10.3% over the same period. Shenzhen average house prices rose 19.5%, while the nominal GDP growth rate of 13.5% over the same period. Beijing, Shanghai and rising prices myth is a monetary phenomenon.
Beijing, Shenzhen and Shanghai housing prices only money can explained it. From 2005 to 2016, Shanghai’s total deposits rose from 2 trillion to 10.5 trillion, an increase of 5 times the average annual growth rate of 15.6%, fully explains the 12.3% annual rise in house prices over the same period. From 2005 to 2016, Beijing’s total deposits grew from 2.7 trillion to 13 trillion, or an increase of nearly 5 times the average annual growth rate of 15.5%, can explain the the average home price rise of 13.9% over the same period. From 2005 to 2016, Shenzhen total deposits increased from 860 billion to 5.8 trillion, an increase of nearly 7 times, an average annual growth rate of 19%, can explain the 19.5% average annual increase in home prices over the same period. This shows that housing prices in Shenzhen led not by chance, because of its currency over the past 10 years, the fastest growing, housing prices are downright monetary phenomenon.
And if we look at a single price increase Beijing, Shanghai and deposit growth over the change, the trend is highly consistent. For example, here is Shanghai:
Another example is Shenzhen:
There is also Beijing:
Since 2015 financial deregulation, Beijing, Shenzhen and Shanghai deposits have soared. We note that the current round of Beijing, Shenzhen and Shanghai amazing price gains, an important reason is the growth rate of deposits soared in 2015, and this year is mainly due to financial deregulation. We mentioned earlier, the end of 2014 when the central bank announced that it will be counted as general deposit interbank deposits, led directly to 2015 January the country’s total deposits increased by 8.5 trillion. And Beijing, Shenzhen and Shanghai is the financial center of the region and of the country, such as almost all of the country’s public fund companies are located in Beijing, Shenzhen and Shanghai, and all large insurance company headquartered in Beijing, Shenzhen and Shanghai and almost all, which makes a natural Beijing, Shenzhen and Shanghai and interbank deposits mainly, the half of the country’s interbank deposits are concentrated in Beijing, Shenzhen and Shanghai, and thus in the future regulation of interbank deposits relaxation, in January 2015 the three have seen soaring deposit growth.
First look at Beijing, total deposits in December 2014 was 9.5 trillion; January 2015 was 10.8 trillion, a net increase of 1.3 trillion, a monthly increase of 13.4%, 2015 annual growth rate of deposits in Beijing reached 30%. Let’s look at Shanghai, total deposits in December 2014 was 6.95 trillion; January 2015 was 8.57 trillion, a net increase of 1.61 trillion, a monthly increase of 23%, 2015 annual growth rate of deposits in Shanghai hit 42%. Finally look at Shenzhen, total deposits in December 2014 was 3.4 trillion, in January 2015 was 4.7 trillion, a net increase of 1.3 trillion, a monthly increase of 37%, 2015 annual deposit growth in Shenzhen surged to 57%, beating Beijing and Shanghai, basically indicates that housing prices in Shenzhen would rise after that.
Since 2016, deposit growth plunged.
2015 financial deregulation brought increased liquidity as a a one-time event, we observed from the beginning of 2016, Beijing, Shenzhen Shanghai and deposit growth appeared a sharp drop, by July 2016, only to Shanghai deposit growth barely kept at 8%, Beijing and Shenzhen deposit growth has dropped to 0% growth, indicating that the liquidity boost is nearly exhausted.
Diving deposit growth, high lending growth won’t last long.
And after deposit stall, Beijing’s loan growth has declined significantly, from August 2015 up 18.6% down to July 2016 at 6.3%. Shanghai’s loan growth reached a March 2016 peak of 24.5%, it has dropped to 18.6% since then, of which the most relevant residential and property loan growth has fallen from 43% at the start of the year to 25%. Currently, only Shenzhen loan growth remained high at 25.8%, but with the deposit growth rate dropping to 0%, high loan growth will not last long.
In conclusion, behind the myth that Beijing, Shenzhen and Shanghai home prices always is actually a downright monetary phenomenon, especially housing prices in 2015 was highly relevant to early 2015 interbank deposits regulatory relaxation, when the intention is to increase the general policy of the bank’s deposits to promote bank lending capacity, for financial support to the real economy. But as a result these three regional financial centers liquidity saw explosive growth, and directly contributed to the skyrocketing housing prices these past 2 years. This process, and the 2015 stock market bull also has striking similarities, that year also a variety of ways around regulation, capital flows into the stock market through various channels with the capital, culminating in the crazy artificial bull market. In 2008, the U.S. formed a subprime crisis, but also that was caused by relaxed regulation of subprime mortgages, and ultimately led to the real estate bubble. Thus, currently in Shanghai people queued for divorced, I want to give a piece of advice, the world does not have assets that only go up in price and never fall, it does not have bubbles that never break! As for the Chinese economy, fortunately, the rising house prices is only structural, but the overall increase does not exceed the nominal growth rate of the economy, and therefore can not be called comprehensive real estate bubble, but a structural real estate bubble. Sincerely hope that the supervision of liquidity timely return, do not form a comprehensive real estate bubble!