Speaker 1: You're listening to Asia Centric from Bloomberg Intelligence, the podcast
Speaker 1: that pulls back the curtain on global business so you
Speaker 1: can invest better across the Pacific rim. I'm Tom Corbett
Speaker 1: in Hong Kong and I'm John Lee owning a home
Speaker 1: in China. It's a mark of accomplishment of status and security.
Speaker 1: Millions of middle class Chinese families have lost fortunes during
Speaker 1: China's housing crisis. Hopeful buyers paid for these homes they
Speaker 1: can't live in because cast strap developers simply cannot finish
Speaker 1: building them. The resulting fiasco has shaken China's economy, spawning
Speaker 1: a mortgage boycott, a crisis of confidence, and homeowners holding
Speaker 1: the bag. What does this mean for China's debt saddled
Speaker 1: property developers and what does China's property market future look like?
Speaker 1: In Japan you have bridges to nowhere, and in China
Speaker 1: you have houses that nobody wants to live in. And
Speaker 1: the damage to Pombia's confidence is already and it's very
Speaker 1: hard to see how is that going to recover. Let's
Speaker 1: bring in Christie Hang, a senior property analysts with Bloomberg Intelligence. Christie, Welcome,
Speaker 1: Hi John, Hi Tom, Thanks for having me, Christie, how
Speaker 1: bad is China's housing market right now? I would say
Speaker 1: it's a combination of weak demand and heavy oversupply. You know,
Speaker 1: in Japan you have bridges to nowhere, and in China
Speaker 1: you have houses that nobody wants to live in. You know,
Speaker 1: just to give your data point, you know, in eight
Speaker 1: cities in China there are five d one million square
Speaker 1: meets off and SO homes wait five one million square meters.
Speaker 1: But that would be the total area of all the
Speaker 1: homes in the U. S State of Massachusetts. Yes, and
Speaker 1: you know that is just for eight cities alone, and
Speaker 1: China has six hundred eighty cities. So it means that
Speaker 1: the amount of and SO homes in China could be
Speaker 1: equivalent to you know, multiple stays in America. So, Christie,
Speaker 1: how long will it take for trying to sell all
Speaker 1: these unsold homes? On average, the supply could take around
Speaker 1: twenty one months to digest, but it does vary across cities.
Speaker 1: You know, in an extreme case, in jong Jo, which
Speaker 1: is a city of thirteen million people in China, the
Speaker 1: housing stock is worth hundred months of seals, which means
Speaker 1: you know, eight years of seals. Christie, let's take a
Speaker 1: step back for a minute. How could this happen? How
Speaker 1: could China's property market get into such a mess where
Speaker 1: you've got home buyers paying for homes they can't live
Speaker 1: in empty cities and developers just settled with debt. What
Speaker 1: went wrong to make it stumble so badly? It boils
Speaker 1: down to the pre sales model in China. You know,
Speaker 1: ninety percent of Chinese homes on a presto basis, and
Speaker 1: this model works so long as sales kept going up,
Speaker 1: and you know, until it's not. Developers then cannot use
Speaker 1: new money raised from seals to pay the construction of
Speaker 1: the earlier projects that they sold. In fact, you know,
Speaker 1: there was the scrow account system in place in China,
Speaker 1: but with the debacle of every Grand you know, the
Speaker 1: whole governments are finding out that the money that is
Speaker 1: supposed to be deposited into this a scrow account is
Speaker 1: not there. Christie? Is it financial mismanagement? Is it greed?
Speaker 1: Is it a lack of oversight? Could is it any
Speaker 1: of those factors? I would say it's a combination of
Speaker 1: all those. So Christie, basically you're saying that if you're
Speaker 1: a Chinese buyer, you put a deposit down on a
Speaker 1: house that was supposed to be built, but that developer
Speaker 1: took that money and used it for other purposes in
Speaker 1: the case of every grand possibly paying their soccer team.
Speaker 1: But is that the case, yes, or their new ventures
Speaker 1: on new energy vehicle that they attempts to overtake Tesla.
Speaker 1: So Christie, how does this compare with the US financial
Speaker 1: crisis back in two thousand and eight. Now, you know,
Speaker 1: we all saw that movie The Big Short, and my
Speaker 1: understanding is that the US housing market really crumbled because
Speaker 1: banks were lending to people they shouldn't have, people with
Speaker 1: bad credit schools and bad FICO schools. Yes, it's a
Speaker 1: very different story in two thousand and seven, two dozen nine.
Speaker 1: You know, the crisis in US is demand side driven.
Speaker 1: We have extended, over extended home bias taking on mortgages
Speaker 1: that they can't repay. And in China is a supply
Speaker 1: side story. We have over leverage developers. You know, since
Speaker 1: the two thousand and sixteen housing boom, developers have aggressively
Speaker 1: took on debts to expand their land bank to push
Speaker 1: for more sales growth, until the government introduced the Three
Speaker 1: Red Lines in which limits their debt metrics. You know
Speaker 1: that for those who can't deliverage the balance ship quickly
Speaker 1: like ever grant, that leads to the failure and you know,
Speaker 1: and later a rise bread liquidity crisis for a lot
Speaker 1: of other private Chinese developers. Christie, a plane crash never
Speaker 1: has a single cause. Plane crashes are usually the result
Speaker 1: of many things going wrong, all at the same time,
Speaker 1: sometimes and after the other. Would you say that describes
Speaker 1: China's housing crisis For China, it's more like a slow
Speaker 1: motion crash um. You know, economists experts have been calling
Speaker 1: on a crash on the property market for many years,
Speaker 1: and a lot of people, you know, saw that coming,
Speaker 1: and a lot of people would think that the regulators
Speaker 1: could have done something earlier to prevent or to to
Speaker 1: to drive a soft landing of the sector. I would say,
Speaker 1: you know, it's a combination of regulations coming to too
Speaker 1: two late, and also developers taking excessive risk and homebuyers
Speaker 1: who have the rosy pictures of home prices would just
Speaker 1: keep on going up forever, and you know, pouring a
Speaker 1: lot of money into investment demand or investing in property
Speaker 1: thinking that prices will keep on going up and until
Speaker 1: the party is over. In so Christie, you're saying that
Speaker 1: Chinese developers have one point for trill and dollars in debt.
Speaker 1: That's a huge figure. How many of these developers in
Speaker 1: default everyone's heard of ever, grand I think also SMA
Speaker 1: as well, can you give us an indication of how
Speaker 1: many of these developers will even be around in five
Speaker 1: years time? Right? You know, um, with the developers that
Speaker 1: have you know, issued dollar bonds, we have tracked that,
Speaker 1: you know, around two thirds of them have been struggling
Speaker 1: with repayment of the debt, and that could pave the
Speaker 1: way for you know, a more permanent structural change of
Speaker 1: the sector, because in a few years you'll see, you
Speaker 1: know a lot of these private Chinese developers, they could
Speaker 1: be going out of business. You know, they are undergoing
Speaker 1: the restructuring process, and these developers are no longer buying
Speaker 1: new plots of land, which also shows you the way
Speaker 1: where home cells are going. Christie, we already know how
Speaker 1: much damage the property crisis has done to homeowners, to borrowers,
Speaker 1: and to the developers. But is there a threat of
Speaker 1: a wider contagion that could possibly engulf banks or other
Speaker 1: lenders and investors. The case in China is different versus
Speaker 1: the US is you know, China control a lot of
Speaker 1: the largest lenders, and with the mid November rescue plan,
Speaker 1: we are seeing that the government is telling lenders to
Speaker 1: extend mortgage payments. We schedule the mortgage payments with bias
Speaker 1: who you know could be struggling with unemployment due to COVID.
Speaker 1: So it seems that the government is taking the stands
Speaker 1: that you know, to for banks to offer more grace
Speaker 1: periods to homebias and borrowers. So the mortgage delinquency in
Speaker 1: China right now is still a very minimal number at
Speaker 1: around one percent. And also at the same time, if
Speaker 1: you look at the residential mortgage backed securities issuance in China,
Speaker 1: the size is very small. It amounts to about two
Speaker 1: GDP and that compare still around fifty pc of GDP
Speaker 1: in two thousands seven during the US A prime crisis.
Speaker 1: And it means that a failure in the housing market
Speaker 1: may not transmit the risk to the securitization market in
Speaker 1: China as it was the case in the US. Christie,
Speaker 1: what has this done to the Chinese middle class longstanding
Speaker 1: faith in home ownership? I would say that the government
Speaker 1: needs to work on you know, restoring that faith in
Speaker 1: home ownership. You know, in one way or another, the
Speaker 1: precurs model has to go. So the government can either
Speaker 1: pit fit to you know, the construction of completed homes
Speaker 1: for sales, or instead of you know, having home bias
Speaker 1: paying upfront for a pre sol unit, you know, have
Speaker 1: them pay in installments to offer some sort of consumer protection. Christie,
Speaker 1: how long will it take for China to get out
Speaker 1: of this mess? When I look at the US after
Speaker 1: two tho E two thousand and nine financial crisis, it
Speaker 1: appeared that they went through a big V shaped recovery.
Speaker 1: In the US, it took around sixteen years for new
Speaker 1: home cells to reach the peak levels originally set in
Speaker 1: two aouser and five. But for China, home cells in
Speaker 1: our view might never make it back to the pre
Speaker 1: crisis peak. You know, that is based on you know,
Speaker 1: four structural changes in China. On one hand, you see
Speaker 1: investment demand is shrinking. Chinese households has always feel property
Speaker 1: as a one way bad and that has been the
Speaker 1: case during two thousand and fifteen to two thousand and twenty,
Speaker 1: when home prices are up five to ten a year
Speaker 1: until when you know, things started tumbling down. Of the
Speaker 1: seventies cities, fifty five cities have home prices going down,
Speaker 1: and no one wants to know potential home bias. Want
Speaker 1: to catch a failing knife. And in the medium term
Speaker 1: for the government has been harping on so long on
Speaker 1: the mantra of housing is for living in, not for speculation.
Speaker 1: And number two, we have seen headlines of shrinking population
Speaker 1: in China and that is going to erow first home
Speaker 1: and upgrade demand for Chinese homes. And number three, the
Speaker 1: government is also driving the push for rental housing, so
Speaker 1: that is going to divert demand away from private home cells.
Speaker 1: And lastly, I talked about two thirds of private developers
Speaker 1: might not be surviving in the medium term, and that
Speaker 1: means that a lot of the supply that has been
Speaker 1: coming to the market might not be coming in the
Speaker 1: coming years. Christine made a very interesting point how China's
Speaker 1: population is declining for the first time in six decades.
Speaker 1: What's going on in China Chinese couples not getting married
Speaker 1: and not having babies, and how is this going to
Speaker 1: impact the housing market? Right, So, on one hand, we're
Speaker 1: expecting fewer new babies and that is going to affect
Speaker 1: the next generation of home bias. And then on the
Speaker 1: other hand, we're talking about less marriages. If you look
Speaker 1: at one person household in China, the numbers has been
Speaker 1: you know, to seventeen in one versus just eight percent
Speaker 1: in two or four, and you know it normally requires
Speaker 1: a couple to pull together, they say things for dunk payment.
Speaker 1: So if there blessed people getting married also might impact
Speaker 1: first home demand. Looks fast forward one year, two years,
Speaker 1: maybe five years in the future. What does China's property
Speaker 1: market look like to you? Right? So, I think it
Speaker 1: would be characterized by um a market with home cells
Speaker 1: and home prices being relatively stagnant. If I compare with
Speaker 1: the US, we see home cells going back up to
Speaker 1: pre crisis level after sixteen years. We also see almost
Speaker 1: fee shade rebound for home prices, home prices that almost
Speaker 1: stubbled in the thirteen years since the financial crisis. That
Speaker 1: might never happen to China, and that are the factors
Speaker 1: contributing to you know, a relatively flatish home cells and
Speaker 1: home price in the medium term. That would entirely change
Speaker 1: the picture of how people feel Chinese developers. Chinese developers
Speaker 1: in the past few years that bonds. That equities have
Speaker 1: attracted a lot of interest because of the strong earnings growth,
Speaker 1: and that is not going to come back for these developers.
Speaker 1: They have to rethink that business model for home sells,
Speaker 1: you know, that could be on the trajectory of a
Speaker 1: projected contraction. They have to increasingly diversify into new businesses.
Speaker 1: They need to go into retail leasing, they need to
Speaker 1: go into construction management or property management. They need to
Speaker 1: find new businesses to drive their earnings growth. And in
Speaker 1: terms of market structure, we're seeing that I've talked about
Speaker 1: how to third of the private developers might not be
Speaker 1: in business in five to ten years. You know, they
Speaker 1: are caught in the debt trouble. They're undergoing the debt
Speaker 1: restructuring and that business might never make a comeback. And
Speaker 1: the Chinese property sector will be dominated by stay owned
Speaker 1: developers and just a few private players like Country Arden
Speaker 1: or long Fall that have been able to survive. Christie,
Speaker 1: how important is the housing market to the Chinese economy
Speaker 1: right now? Right? So, just on the housing market itself,
Speaker 1: real estate investments made up around fourteen of China's GDP
Speaker 1: and this is a much bigger ratio versus the US
Speaker 1: during the supreme crisis. You know, it's just around five
Speaker 1: percent of GDP, so it means that housing market crash
Speaker 1: it could be a bigger blow to China's real economy
Speaker 1: and the actual impact could be even bigger because if
Speaker 1: you include also the upstream and the downstream industries like materials, constructions, furnishing,
Speaker 1: and renovation, you name it, that it's going to affect
Speaker 1: you know, a bigger amount of GDP and people who
Speaker 1: employ in those sector. So hold on, Christie, you're saying
Speaker 1: that China's current housing crisis is almost three times bigger
Speaker 1: than the US during the financial crisis in two thousand
Speaker 1: and eight. It is. But the good news for China's
Speaker 1: is that though the housing market crisis could be just
Speaker 1: contained within the sector, that compares to the US where
Speaker 1: you know big NBAS losses that might have not happened
Speaker 1: to China because NBAS only accounts for around two p
Speaker 1: of China's GDP. Christie, think about how China's property crisis
Speaker 1: has impacted attitudes toward homeownership. Has something fundamentally changed. I
Speaker 1: think that perception of investing in property could have been
Speaker 1: changed irrevocably um Chinese people has been selaced about investing
Speaker 1: in property, and they always think of property as a
Speaker 1: one way back and that has been true during two
Speaker 1: thousand and fifteen to twenty when prices go up by
Speaker 1: five to ten percent a year. Until now this is
Speaker 1: no longer the story. You know, our of seventy cities,
Speaker 1: fifty five cities are having down trend in home insis
Speaker 1: and people are adjusting the expectation. You know, they are
Speaker 1: now thinking of property as an asset that has very
Speaker 1: limited upside. But right now they might have to be
Speaker 1: rethinking the allocation of investments. And within China there's very
Speaker 1: limited investment options. You know. You can think about the
Speaker 1: shot market, you can think about bank deposits, wealth management products,
Speaker 1: and then there's the property sector that you can invest in.
Speaker 1: And unfortunately for a lot of Chinese people, you cannot
Speaker 1: invest overseas because of capital control. Yea, Christie. You know,
Speaker 1: China is an extremely vast economy. It's got one point
Speaker 1: four billion people. Is the dire housing situation the same
Speaker 1: across all the different cities in China, So it's a
Speaker 1: very different stories for the different housing markets. You know,
Speaker 1: we have read headlines about China shrinking population and if
Speaker 1: you look at the largest cities like han Jo, which
Speaker 1: is the headquarter of Ali Baba. Population of Hanjo is
Speaker 1: still up seven percent a year in the past five years.
Speaker 1: And if you look at it this way, population inflow
Speaker 1: is key to drive demanded for those housing markets, and
Speaker 1: that compares with smaller cities. They're facing population outflow and
Speaker 1: there's also weakening investment demand and a lot of oversupply
Speaker 1: of infantries in those cities, and that is going to
Speaker 1: cast a shadow over the investment prospect of smallest cities
Speaker 1: housing market where you see you know, prices facing the
Speaker 1: biggest pressure and sells also coming down. A famous US
Speaker 1: president once told Americans during troubled times that the only
Speaker 1: thing we have to fear is fear itself. Is that
Speaker 1: the case in China's housing crisis. Are buyers and borrowers
Speaker 1: letting fear feed on itself or do you think there's
Speaker 1: more to it? I think the biggest problem in the
Speaker 1: Chinese property market right now is very hard to find
Speaker 1: will link bias. Home bias are increasingly worried about if
Speaker 1: I'm putting money on a print of property today, is
Speaker 1: that going to be delivered in two to three years?
Speaker 1: And with the government's rescue also stopping short of rescuing
Speaker 1: a lot of these distrest developers. You know, the the
Speaker 1: situation is not improving and the damage to home biased
Speaker 1: confidence is already done and it's very hard to see
Speaker 1: how is that going to recover? Christie final question, would
Speaker 1: you buy a house in China right now? And if so,
Speaker 1: which city would you buy in? I think the answer
Speaker 1: I always would have for that question is to be
Speaker 1: shan Jan, which is the headquarter of Huawei and ten
Speaker 1: cent um. It is the Silicon valley of China, and
Speaker 1: buying property is always about looking at supply and demand.
Speaker 1: It is a city with very limited lens supply and
Speaker 1: a lot of demand because of population inflow into the
Speaker 1: city because of you know, economic prospect and job opportunities.
Speaker 1: So with the latest run of adjustments and you know,
Speaker 1: some downtrend in prices, it could be a good entry
Speaker 1: point to think about infesting in a property in chian Gin.
Speaker 1: And it's also the case for you know, a lot
Speaker 1: of the tier one cities in China. I would avoid
Speaker 1: low tier cities um as you say, you know, ghost tanks,
Speaker 1: a lot of supply and population outflow and very weak
Speaker 1: investment demand, meaning that these properties would continue to face
Speaker 1: price pressure. Christie Hung, senior analyst with Bloomberg Intelligence. Christie,
Speaker 1: it's a remarkable story what's happening in China, and it
Speaker 1: sounds like there's gonna be a lot more to talk
Speaker 1: about before it's all over. Thanks Tom, and thanks John.
Speaker 1: It's great to be here. I'm Tom Corbett in Hong
Speaker 1: Kong and I'm John Lee. And you've been listening to
Speaker 1: the Asia Centric podcast.