Good morning. Is China’s housing market a huge bubble that’s starting to burst?
The Evergrande troubles
I was sitting at a stoplight in Beijing when I first noticed the young men who would walk in between cars and hand out brochures to drivers. I rolled down the window and took one. To my surprise, it was a for-sale advertisement for apartments in a newly constructed building.
This was in 2010, when the American economy was still enduring the aftereffects of its burst housing bubble. I had covered the rise of that bubble, and the fliers in Beijing reminded me of Florida during its frothiest days: The Chinese real-estate market had grown so hot that the people were marketing apartments at red lights, as if buying one were as common as buying a soda.
There were many other signs of a property bubble during that trip. On sidewalks in Shanghai, I walked past real-estate agencies that had set up outdoor tables, to accommodate all of the demand. During my first night staying at a new hotel in the small city of Wuqi, I didn’t see a single other guest — in the lobby, restaurant or elevators. Around this same time, Jim Chanos, a prominent American investor, warned that China’s real-estate excesses had placed it on a “treadmill to hell” and that the bubble might burst at any point.
But the bubble did not burst in 2010. It did not burst in 2011, nor has it burst in the decade since — unless, that is, it’s starting to do so this week.
Signs of froth
The troubles of China Evergrande, one of the country’s largest developers, have focused the world’s attention on China’s housing market. A recent slowing of the real-estate sales in China appears to put Evergrande on the brink of insolvency. Without as much cash flow as in prior years, the company may be unable to meet a large payment due tomorrow. So far, the Chinese government has offered no signs that it would step in to save the company.
This week’s news sent stocks around the world falling, with investors worried that the failure of Evergrande could set off a cycle of defaults among banks and other companies. “Every once in a while a company grows so big and messy that governments fear what would happen to the broader economy if it were to fail,” my colleagues Alexandra Stevenson and Cao Li have written. Evergrande, they explained, “is that company.”
Some other Chinese developers may also be in trouble. And by almost any measure, Chinese real estate is suspiciously expensive.
Consider the median price of homes in China’s largest cities relative to the median incomes in those cities — a classic measure of housing valuation (and one that was blinking bright red in the U.S. before the housing bubble burst):
Chinese real estate, as Matthew Brooker of Bloomberg Opinion argued recently,
… is a bubble of epic proportions, one that by various metrics easily overshadows the pre-global financial crisis run-up in U.S. property values (which burst with such disastrous consequences) or the unsustainable booms in European countries such as Ireland and Spain. It stands comparison with the Japanese real estate bubble of the 1980s, which helped send the country into at least one “lost decade” when it finally burst in the early 1990s.
It is becoming increasingly popular to argue that the Chinese government has figured out a way to sustain the bubble forever. Beijing has many abilities, but making a bubble last forever isn’t one of them. For thousands of years, Chinese emperors tried to achieve immortality by swallowing all kinds of stuff. None worked.
Given all of this, it’s easy to see how the bubble warnings of a decade ago — like Chanos’s — may not have been wrong so much as they were early. A similar dynamic played out in the U.S. a decade and a half ago: Economists who looked like alarmists in 2005 turned into prophets by 2008.
Then again, China is different from the U.S., Europe and Japan in some important ways. Even though China’s economy has slowed in recent years, it is still growing more quickly than richer economies are. As a result, China can partly grow into its housing bubble. Many families’ incomes are rising rapidly enough, for instance, that they are able to meet mortgage payments that initially may have looked ambitious.
China’s government also has large cash reserves and has been willing to do whatever is necessary to avoid an economic crisis. Over the past several years, the government has taken steps to cool the market, like restricting sales and home loans in some situations. Those moves have slowed down price increases in recent years.
“The longevity of the boom suggests that the market is more complex than its depictions as a bubble suggest,” The Economist magazine has written.
A soft landing?
During my trip in 2010, I sat down with Guo Shuqing, who was then the chairman of China Construction Bank and is now the country’s top banking regulator. He agreed that China’s economy suffered from imbalances, including too much construction. Still, he added, “I think we have plenty of time, plenty of tools and plenty of instruments to make a soft landing and a smooth transformation.”
Based on standard economic measures, China still has not done nearly enough to fix its imbalances — and it’s usually a mistake to bet against the normal rules of economics. But China’s unmatched size and long record of growth offer reasons at least to wonder whether this bubble really is different.