Xi takes revenge on housing speculators

Xi’s Revenge: How China’s Housing Speculators Lost Everything

The great Chinese housing boom is officially a bust.

Reaching its zenith in 2021, the residential market has declined for more than four years. Prices in major cities are down 40 percent from their peak, and in some markets as much as 50 percent. The demand for home ownership has evaporated.

I saw this coming. In my 2015 book When the Bubble Bursts: Surviving the Canadian Real Estate Crash, I identified China — alongside Canada and Australia — as being in the throes of a major real estate bubble. China's was extraordinary: real house prices rose an average of 17 percent annually for a decade from 2003 to 2013, more than twice as fast as disposable incomes. Land prices in Beijing and Shanghai rose even faster.

What made China's bubble unique was its mechanism. Wealthier households were buying second homes and leaving them empty as a store of wealth. Estimates suggested that roughly 40 percent of wealthier households owned a vacant second property — yet prices kept rising. The vacancy rate soared alongside house prices, a combination that defied economic logic until it didn't.

Is there light at the end of the tunnel? Perhaps — but it is distant.

UBS recently turned positive on Chinese property, citing a modest upturn in Tier 1 city price indexes and improved vacancy rates as subdued new supply and rental absorption have begun to clear some stock. Export industries are gaining strength in autos and high-tech, and share prices are rising.

But the historical comparisons are sobering. Japan's bubble took 13 years from its 1990 peak to a bottom in 2002, with land prices falling 75 percent. The U.S. housing bubble deflated from 2006 to 2010, bottoming at minus 38 percent. China's prices have fallen faster — roughly 40 to 50 percent in just four years — but speed of decline is not the same as proximity to a bottom.

The wild card is Xi Jinping. In 2016 he declared that "houses are for living, not for speculation," and in 2020 his "Three Red Lines" policy deliberately cracked down on over-leveraged developers — effectively pulling the pin on the grenade. Recent government pronouncements emphasize support for first-time buyers and bank stability, but not direct intervention to arrest price declines. Xi appears content to let speculators suffer — and lower prices do help young families who were priced out during the boom.

That political calculus suggests prices will grind lower for several more years before a genuine bottom is reached.

Hilliard MacBeth

 

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Richardson Wealth Limited is a subsidiary of iA Financial Corporation Inc. and is not affiliated with James Richardson & Sons, Limited. Richardson Wealth is a trade-mark of James Richardson & Sons, Limited and Richardson Wealth Limited is a licensed user of the mark. Richardson Wealth Limited, Member Canadian Investor Protection Fund.