We are frequently so entranced with the meteoric price increases of Chinese real estate that seem to dwarf anything we’ve seen before that we frequently lose sight of details that really matter. These details beyond price headlines really matter because many of these are the market dynamics that impact future changes.
One recently caught my eye and I will be honest in saying that I’m still trying to process the impact of what this data means. The Chinese real estate market has extremely low levels of relative liquidity.
What I mean by that is that relative to the number of housing units in specific metro areas, there are actually a relatively small number of housing transactions. Many times transactions will be reported for major metro areas in China, but there is frequently little context given that obscures the relative measure of liquidity.
To give you, some idea of what I mean the average home in the United States is sold roughly every 20 years. This excludes housing units that are apartments, but gives us some idea. Furthermore, this number does not fluctuate as much as you might think except in extreme periods like during and after the 2008 subprime crisis.
However, in China these numbers are astoundingly different. As an example, in 2015 Shenzhen housing transactions relative to the number of housing units was under 1.9%. If each unit could only be sold once before being sold again, it would take Shenzhen 54 years before being resold. What is amazing is that projected 2016 housing transactions in Shenzhen have gone down from 2015. If current rates hold, unit turnover will fall to about 1.2% or approximately an 86 year turnover cycle.
In other cities, we see similar levels of low relatively real estate market liquidity. 2016 projections, estimate Shanghai unit turnover at under 2.7%, Tianjin at 3.4%, and Xiamen at 2%. This would equal cyclical turn over rates of 37.6, 29.6, and 50.3 years. To put these numbers in perspective, China only opened in 1979 so according to these numbers, each unit has yet to even sell a second time with many years to run.
Other cities show similarly low levels of relative unit turnover. I’ll be honest in saying that giving some the peculiarities of the Chinese real estate market, I’m still trying to think through all the potential implications. I have a couple of theories.
First, it is quite likely that Chinese real estate hit a tipping point a few years ago where real estate had been transferred on a preferential basis to existing urban residents under various schemes, the large majority of savings had been consumed to purchase housing units, and the only driver of the Chinese real estate market became channeled credit via state owned banks. As I noted in a previous post, 2015 was the first year where the marginal new housing unit would have equaled a mortgage of greater than 50% LTV. 2016 is likely to be a significant increase from 2015 implying that the real estate driver has changed from a couple of years ago. It is not longer unit transfer and savings consumption and credit growth of households.
Second, this seems to place a lot of pressure on Beijing to keep real estate prices elevated. Many in China view this as a form of savings given the lack of other options and household income levels that are both under pressure and slower growing than real estate prices. While households are little invested in the stock market, they are heavily invested in real estate implying much higher wealth dependence effect on real estate.
Third, it seems to imply much greater fragility in supporting the real estate market than is generally assumed. Typically when prices go up, we see rapid growth in turnover volume but not only have we not seen this, in some cases we have see a decline in turnover. The only apparent support of the real estate market is higher credit growth which means to support this, PBOC will need to pump even higher levels of credit to support price increases or stability. This implies a lot more fragility in the real estate market given the relative lack of volume.
I think there are other implications but I’m still thinking through many of these implications. However, I think it is pretty clear, there is a lot more going on here that requires thinking about the market microstructure of what is driving these dynamics.