In 2023, while the transaction volume of first-hand houses will continue to shrink, the transaction volume of second-hand houses will be widespread and large in the context of continued downward revision. Based on third-party data, many important valuation indicators suggest that the second-hand housing may have returned to a reasonable range, and the correction of the second-hand housing seems to be nearing completion.
The pressure on the first-hand home market may reflect a combination of factors such as increasing delivery risks and insufficient delivery. From the point of view of stabilizing the real estate market and the macroeconomy as soon as possibleOn the basis of eliminating the liquidity risk of real estate enterprises as soon as possible and further eliminating the delivery risk, it is necessary to guide the first-hand house to fully correct and restore the market function as soon as possible.
It is worth being highly vigilant that if the liquidity risk of real estate companies spreads further, there are still many variables in the evolution of the situation in the future.
Shanwen Gao is a member of the Academic Committee of the China Finance 40 Forum (CF40) and the Chief Economist of SDIC.
This article is a keynote exchange made by the author at the press conference of the CF40 Macro Policy Quarterly Report (Q4 2023) on January 27, 2024.
Beijing, January 27, 2024 – Shanwen Gao delivers a speech at the launch of the CF40 Macro Policy Quarterly Report (Q4 2023).
A few questions about the current real estate market
Text |Gao Shanwen
In the past two years, the real estate market has been the most core factor affecting China's economy, which has become a broad consensus in the market. There are still many questions about where the real estate market will go in 2024. In the past period, the relevant authorities have further launched a series of policies around the real estate market, and all market participants are closely monitoring the effectiveness of the policies. In this context, I would like to share some of our observations on the real estate market as a basis for understanding and evaluating the effects of the policy, and trying to clarify the direction of the real estate market and the direction of macroeconomic operation in 2024 and beyond.
China's real estate investment has overshooted
At the moment, the idea that China is experiencing the bursting of the housing bubble is very popular. It is believed that there is a needle waiting for any bubble, just not knowing when the needle will poke out. It is only on the right side that we can recognize that the bubble has burst. On the left side it is possible to have a high degree of suspicion of the presence of a bubble, but it is not known when and under what conditions it will burst.
Many people believe that China's real estate bubble should have burst earlier, but for various reasons, the bursting and correction have been repeatedly postponed, and it is not until 2021-2022 that it finally begins to be completely liquidated and corrected. A bubble that keeps blowing, and the correction, although delayed, is bound to happen sooner or later. From the perspective of the whole world, the bursting of the bubble will always bring social suffering, and the bubble should not be saved, and it is difficult to save it.
Along these lines, many believe that the current situation is the price to be paid sooner or later. Historically, the United States, Japan, and many other countries have paid the price for bursting bubbles. Now that China has enjoyed the benefits of the housing bubble being blown up, it will have to bear the cost of bursting.
According to the international experience of the correction process after the bursting of the bubble, it may take about five years or more for the bubble to be fully absorbed, and then the economy will return to the relatively weak normal expansion range. In the course of the correction, aggregate demand will be weak and all aspects of the economy will face difficulties.
According to this point of view, China's real estate bubble will begin to burst in 2022, and then the economy will not normalize until at least 2027, during which it will inevitably face problems such as insufficient demand, economic downturn, deflation, increased bank bad debts, and financial difficulties, which many countries have experienced. Along this line of thinking, whether measures are taken to stimulate domestic demand or not, there will be no fundamental difference, and the market liquidation will happen sooner or later, and it will be very destructive.
This is the prevailing view at the moment, and there are many aspects worth pondering, but a closer look at the data reveals many aspects that deserve further discussion and scrutiny.
The so-called bubble refers to a large amount of speculative demand pouring into the market over a period of time, pushing ** away from fundamentals to an unsustainable height. These speculative demands are not invested based on fundamentals, but are designed to benefit from the rising process. To put it simply, it is to benefit by buying today and selling tomorrow. This process is usually accompanied by an increase in leverage, because the increase in leverage will bring greater returns.
When the ** is seriously detached from the fundamentals, it will inevitably face a correction in the end. On the one hand, the correction will be very large; On the other hand, corrections are usually accompanied by lever breakage and deleveraging, which can be very painful.
Due to the influx of a large amount of speculative demand into the market during the bubble rise, ** will be abnormally amplified; And after the speculative demand disappears, the amplified ** will form a surplus. The process of bursting the bubble is, on the one hand, the removal of excessive leverage, and on the other hand, the removal of excess. Clearing the excess means returning to an unusually weak level and usually takes a long time.
A look back at the process of bursting the bubble in Japan. Before 1986, Japan's real estate investment accounted for only 8% of GDP. During the bubble process, the proportion of real estate investment rose from 8% to nearly 11%. In the face of the expansion of demand, ** is also expanding rapidly. After the bursting of the housing bubble, the elimination of the surplus** meant that the share of real estate investment would have to fall to at least less than 8%, a process that Japan did not begin until 1998.
Prior to this, banks were on the fence to maintain their balance sheets, so the state of surplus continued. It was not until the outbreak of the financial crisis in Japan in 1998 that the surplus began to be seriously eliminated. It was not until 2003 that it basically stabilized, and the proportion of real estate investment has remained roughly at 6 since then5%, which is 1 less than before the foam was formed5 percentage points. It took Japan more than 10 years from the bursting of the bubble; It took about five years for Japan to clear the surplus from the outbreak of the financial crisis.
Figure 1 Japan's real estate investment as a percentage of GDP (%)
Data**: Wind, SDIC Research Center.
The situation in the United States is similar to that of Japan. Before 2002, real estate investment in the United States accounted for about 8% of GDP. In 2003, the proportion of real estate investment increased rapidly. After the bubble bursts, ** drops rapidly. The difference is that immediately after the bubble burst, the United States began to purge the excess, and real estate investment once reached the level of about 5%, while Japan dragged on for at least 6 years.
After 2013, the process of eliminating excess in the United States was basically over, and real estate investment returned to a relatively normal level, accounting for nearly 7%, 1 percentage point lower than before the bubble. It also took about five years for the U.S. economy to largely return to normal in 2013 from the bursting of the bubble in 2008.
The situation in Spain is much the same. In this process, there is not much work that the market can do, because it will take time for the excess and leverage to break before the market stabilizes.
Figure 2 U.S. real estate investment as a percentage of GDP (%)
Data**: Wind, SDIC Research Center.
It is worth noting thatThere doesn't seem to be a significant accumulation of ** excess。China's real estate investment as a share of GDP peaked in 2013, and since then the share of real estate investment has declined rapidly, possibly falling to 5 by 2024About 5%.
If we consider that China experienced a clear real estate bubble from 2016 to 2021, from the perspective of investment, it seems that there is no significant expansion of the trend of **, or it is quite slight. In contrast, after 2021, the decline in ** is extremely significant.
Figure 3 China's real estate investment as a percentage of GDP (%)
Data**: Wind, SDIC Research Center.
In summary, the prevailing view is that China is experiencing the bursting of a real estate bubble. But at the level of surplus, the performance of China's real estate market is very different from that of a typical real estate bubbleThe excess is not obvious, and the removal of the excess (if it exists) is very thorough, very fast, and very large
The first correction of China's second-hand housing market
It may be almost complete in 2023
From the transaction volume level, in the process of real estate bubble, a large amount of speculative demand poured into the market, and the transaction volume was amplified. Once the bubble bursts, it will cause market players to no longer have the willingness to increase leverage, not only speculative demand will disappear, but also a part of the normal demand overdraft will disappear, so the trading volume will shrink rapidly. After trading volume bottoms out, it often takes a long time to recover because there is a lot of excess that needs to be cleared and a lot of overdrafts that need to be repaired gradually.
We focus on the U.S. second-hand housing market. Observing the second-hand housing market, it is because after the bubble burst, real estate companies contracted investment, and the first-hand housing market declined to affect transactions, but the second-hand housing market will not be affected by this. Furthermore, after the bubble bursts, part of the demand will be transferred from first-hand houses to second-hand houses, which will actually help push up the transaction volume of second-hand houses. Therefore, the conclusions drawn from the observation of second-hand houses are conservative.
In the process of bubble in the United States, the transaction volume of second-hand housing has expanded rapidly, from more than 500,000 units per annum to more than 700,000 units, with an expansion ratio of nearly 40%. After the bubble burst, the transaction volume of second-hand housing was basically discounted, and then it remained at the bottom for a long time, and it was not until after 2013 that the transaction volume returned to normal levels, and investment gradually returned to normal.
In this process, second-hand housing sales fluctuated sharply in 2009 and 2010. This is caused by landlords not being able to pay their mortgages and banks "foreclosures" en masse. Annual data continued** and remained very low, in line with the investment data.
Figure 4 Annualized sales of second-hand homes in the United States (1,000 units).
Data: Bloomberg, SDIC Research Center.
During the bursting of the bubble in Spain, the second-hand housing market adjusted to a similar extent and duration to the United States, as well as to the Netherlands and the United Kingdom. In most cases, the observation of the second-hand housing market is similar, with a sharp contraction of transaction volumes, around 50%, and a bottom lasting about five or six years, and then gradually returning to normal. There are a few exceptions, of course, but this is a common pattern.
The situation in China is somewhat different. Judging from the data disclosed on the basis of transfer in 13 cities that we are easy to collect, the number of first-hand home transactions has continued to shrink since 2021, and will shrink to a level of about 7% by 2023. The transaction volume of the second-hand housing market actually only fell for one year in 2022, and it only fell for two years from the top in 2020, and it will increase significantly in 2023, achieving double-digit growth.
Fig. 5 Transaction area index of new and second-hand houses in 13 cities.
Data**: Wind, SDIC Research Center.
Judging from the data of CRIC 30 cities with a larger caliber, the transaction volume of second-hand housing in China's second-tier cities will hit a record high in 2023. Compared with the first-hand house falling from the top to a 7% discount, the transaction volume of the second-hand house will only drop to an 8% discount in 2022, and it will increase significantly in 2023, hitting a record high. A similar conclusion can be drawn with other data of different calibers.
Fig.6 Sales area of new and second-hand houses in 30 cities of CRC.
Data**: CRIC, SDIC Research Center.
Extrapolating from the publicly disclosed data, the transaction volume of second-hand housing in China in 2023 will be significantly enlarged. While the number of first-hand homes continued to decline by 8%, the number of second-hand housing transactions increased significantly, which is very different from the market correction in most bubble bursts. Among them, there are two questions: first, why is the second-hand housing significantly increased? Second, why is the performance of second-hand housing and first-hand housing so different?
The chart below is our second-hand housing ** and rent** index in 25 cities based on data from third-party intermediaries (Beike), of which 100 in November 2018. Beike's 25 city data is almost representative of China's provincial capitals.
Looking at the rental index of 25 cities, the rental market has shrunk since the epidemic, and the rental index has dropped to 90% in November 2018. From the perspective of residential selling prices in 25 cities, in 2020-2021, some opinions believe that the "last stick of bubbles", although housing rents fell by 10%, residential ** rose by 8%, and the increase in * clearly deviated from the fundamentals.
At the end of 2021, house prices in 25 cities started from the top**, and so far close to 20% from the top**, the * index has been significantly lower than in November 2018, the absolute level of house prices may have reached the level of the end of 2017 and the first half of 2018, and the valuation of house prices relative to rents has also been significantly revised, and may now be slightly better than the level of the second half of 2018.
Since 2018, the disposable income of Chinese residents has increased by 30%. This means that the real estate market in second-tier cities has returned to the level of 2018 after two years of adjustment, and the house-price-to-income ratio has returned to the level before 2017.
Fig.7 Index of second-hand houses** and rents** in Shell 25 cities (%)
Data**: Wind, SDIC Research Center.
Considering the affordability of loans, the bad news is that residents' expected incomes are falling, and the good news is that mortgage rates are much lower than they were then. Under reasonable duration assumptions, the affordability of the loan is about the same relative to income.
We know that 2016-2017 was the starting point for the most recent round of real estate** that clearly began to rise. Judging from these indicators, the current residential valuation in second-tier cities has returned to the level of the early and middle stages of the current round of bubbles, that is, the valuation is relatively low and affordable, so rigid demand has entered the market and transaction volume has begun to expand.
The above is to understand why the second-hand housing transaction volume is enlarged from the valuation level, if the valuation changes at the micro level and the lack of surplus at the macro level are combined, our basic conclusion isThe correction of China's second-hand housing market is close to completion in 2023.
Further extended conclusions are:What China's residential market is experiencing is a clear correction rather than a bursting of the bubble。The reason for the correction is that due to the sudden epidemic, rents and residents' expected incomes have declined, but housing prices have continued to ** during the same period, resulting in assets ** detached from fundamentals and forcing ** downward revision to return.
The core issues of the current macroeconomy
It is to restore the function of the first-hand housing market as soon as possible
There may be three reasons for the further contraction of the first-hand housing market.
First, the local government has limited the price of the first-hand housing market, which cannot be fully corrected, and the market is difficult to clear, resulting in the inability to release the transaction volume, the market cannot play its normal function, and the adjustment process cannot be completed smoothly and thoroughly. The second-hand housing can be more free, once adjusted to a reasonable range, the rigid demand can be released.
Second, there is a delivery risk in the first-hand housing market, and the delivery pressure may be further expanded.
The third is that the first-hand housing has shrunk too quickly, the land acquisition and construction of enterprises have shrunk, and the launch of new houses has declined.
According to the adjustment of second-hand housing, if the delivery risk can be fully eliminated, the liquidity risk of real estate enterprises can be completely blocked, and the first-hand housing market can be fully adjusted and revised downward, then the stabilization of the first-hand housing market is worth expecting.
In that sense, I thinkThe core issue of the current macro economy is to restore the function of the first-hand housing market as soon as possible
It needs to be fully emphasized and highly vigilant that if the liquidity risk of real estate enterprises spreads further, there are still many variables in the evolution of the future situation, and the uncertainty in this regard is still very large.