Chinese residential property prices continued their relentless climb in December. The China Real Estate Index System (CREIS) reports that the average price of new homes in 100 cities jumped 0.7% from November, the 19th straight monthly increase. In November, the comparable figure was just about the same, 0.68%.
CREIS also reports prices increased 11.5% in December over the same month in 2012, the biggest year-on-year improvement since August 2011.
These month-on-month and year-on-year figures roughly track those from other surveys. Residential property ended 2013 as the winner in China. Forget stocks, trust investments, or bonds. The best place to be in China last year was in homes.
How can that be when the country is littered, from one end to the other, with “ghost cities”? The oversupply of residential units can only be described as horrendous. There was, according to Liu Yuanchun of People’s University, 1.46 billion square meters of housing unsold at the end of September, equivalent to 10 months’ sales.
There is no indication the situation has improved since then. Capital Economics, for instance, estimates that there are now more than 3 million unsold units held by listed developers, a million units more than their inventory two years ago. That’s an all-time record.
In a normal economy, an overhang of this sort would depress prices, but in China many developers do not have to dump units because they are not allowed to go bankrupt. Cities have informal quotas for business failures, so the country now has zombie developers, dead but still walking.
Yet the general aversion to bankruptcy is only one factor why residential property keeps soaring. The most important reason is that there is too much money in China and as long as the central government maintains an ultra loose monetary policy, the Chinese people will continue to buy apartments as their best inflation hedge.
Huang Yu of the China Index Academy, the country’s largest private provider of real estate data, believes that every 1% increase in M2 increases home prices by 0.64%. In November, the last month for which this figure is available, M2 shot up 14.2% year-on-year. This measure probably increased 14.1% in 2013 as a whole.
Analysts are expecting more or less the same increase this year. So the forecast for property prices in the next 12 months looks bright. Moreover, we should not be surprised if property prices begin to outperform this measure—analysts are starting to say that M2 no longer fully captures money creation in China because of new channels of credit. In any event, as the South China Morning Post notes, “Cheap and abundant liquidity has been a key driver of China’s home prices.”
The newspaper is right. Observers chalk up today’s surge in home prices to two rate reductions in the middle of 2012. Moreover, this iron-like relationship between liquidity and home values holds today: some think that price growth in December was restrained primarily by the scarcity of mortgages.
At first glance, housing owners should be worried that the central government is trying to rein in the money supply. We saw evidence of this in both June and December, when interbank rates soared and banks defaulted because the People’s Bank of China, the central bank, did not provide liquidity as calendar quarters were about to end. During both months banks scrambled to raise cash to meet regulatory ratios.
Property owners should take comfort because in both months central authorities quickly reversed course. In June, the central bank massively intervened with direct bailouts of banks and injections of liquidity. Last month, the PBOC followed the same sequence, adding liquidity first through the large banking institutions and then open-market operations.
Despite what almost every observer thinks, the central bank was not trying to tighten credit in June and December; it was merely refusing to expand credit at a crazy pace. In both months, PBOC technocrats realized that not injecting liquidity would lead to disaster, so they eventually gave in, pouring even more money into the economy.
The bottom line for residential property owners in 2014? It looks like another good year because the central bank has learned its lesson and will continue to add liquidity, often and in big amounts. And this liquidity will, as the past tells us, float residential real estate prices along with it. And don’t be put off by talk of interest rate reform, which would push up mortgage rates and therefore depress prices. For the same reason that the PBOC lost its nerve in June and December, Beijing technocrats this year will be hesitant to implement meaningful changes to the country’s interest rate regime.
Of course, there is one very large thunder cloud attached to this thin sliver lining. At some point, unrestrained credit creation will lead to a disaster of its own. Except for analysts quoted by state media, like Yukon Huang of the Carnegie Endowment, nobody thinks the Chinese economy can continue this debt-fueled path.
And that means we need to listen to Patrick Chovanec of Silvercrest Asset Management. “China’s leaders are riding a runaway train that they don’t quite know how to stop,” the keen observer wrote last week. “And they’re running out of track.”
The Bottom line is, It is right time to invest into real estate in China now.
