Gao Shanwen is a director of the China Chief Economist Forum and the chief economist of SDIC Securities
Dr. Gao Shanwen, chief economist of SDIC Securities, shared his latest views on real estate issues at the CF40 macro policy quarterly report conference on the 28th.
Contrary to the currently very popular view ---- that China is experiencing a burst of the housing bubble,
Gao Shanwen said that he believes that what China's real estate market is experiencing is not the bursting of a bubble, but a price correction after the fundamentals have deteriorated.
According to Dr. Gao's presentation, his research shows that for the bursting of bubbles, from the past experience of the United States, Japan and other countries, the disappearance of speculative demand has cleared the oversupply, a process that takes about five or six years.
However, the accumulation of oversupply in China has not been seen in fact, and even if it is believed that a short-term oversupply occurred in 2020, the oversupply in 2021 will be eliminated very thoroughly.
Therefore, in terms of oversupply, the so-called "bubble burst" that China is experiencing is very different from the typical real estate bubble.
From the perspective of the second-hand housing transaction market, from the observation of data of different calibers,
In China's second-tier cities, the number of second-hand housing transactions in 2023 will increase significantly, and even hit a record high in some cases.
This is also very different from the market correction process that occurs when most bubbles burst.
A basic conclusion is that the correction of the price of China's second-hand housing market has been basically completed in 2023.
And the price correction will take much faster than many pessimists fear.
Liulishidian has compiled and selected the highlights shared by Dr. Gao Shanwen as follows:
1. If the enlargement of the transaction volume of second-hand housing is not there a surplus at the macro level, and the changes in valuation at the micro level are combined.
Our basic conclusion is that the correction of the price of China's second-hand housing market has been basically completed in 2023.
The implication is that China's housing market has experienced a brief price correction of bubbles, rather than the bursting of a bubble.
2. The problem of the first-hand housing market is the tightening of supply, serious delivery risks, and incomplete price adjustment.
Or we can put it another way, taking into account the price limit of the first-hand house, and under the condition that the delivery risk can be completely eliminated,
The adjustment of the price of first-hand houses, I personally think, has been completed more than half or more than half,
China's real estate is going through
Is it a price correction or a bubble bursting?
We know that the very popular opinion, if not everybody, is that
China is experiencing the bursting of a real estate bubble.
It is believed that there is a needle waiting for any bubble, it's just that we don't know when that needle will poke out.
Moreover, many people further believe that the bursting and correction of China's real estate bubble is a process that has been repeatedly postponed in history.
The bubble that keeps blowing up, and its correction, although it has been repeatedly delayed, is bound to happen sooner or later.
From the perspective of the whole world, the bursting of a bubble always brings great social suffering.
But in the face of the social pain caused by the bursting of the bubble, the government is difficult and unable to save it, and it may not even be able to save it economically and morally.
Many people think that now that the bubble has burst, the government should not save it, it can't save it, and in fact it can't save it.
Along these lines, many people believe that the situation we are facing now is the price we will have to pay sooner or later, and are paying, for the bursting of the bubble.
Judging from the process of bursting many bubbles, it is not uncommon for the general bubble to be completely absorbed in about 5 years, and the economy to return to a relatively weak normal process.
In fact, it can be seen more than 5 years ago.
If our bubble burst in 2022, then along this line of thought, it will be after 2027.
From this point of view, in this context, you don't have much effective solution.
That is, you do it and you don't do it, the difference is not fundamental, it's not that big, and this clearing it will happen sooner or later.
This is a popular view, and it does not mean that I agree with this view, but I just take it out first and use it as a background for my analysis.
The current situation in China
It's very different from a bubble bursting
We know what a bubble is, and the very popular definition is,
For a period of time, there was a massive amount of speculative demand pouring into the market, pushing prices up to unsustainable heights that were detached from fundamentals.
I buy today because I expect it to rise tomorrow, and when I sell it after the price rises tomorrow, I can benefit, which is simply such a process.
In this process, it is usually accompanied by an increase in leverage for various reasons.
And for a while, this became a common belief in financial markets and even in the economy as a whole.
Along these lines, in the process of the bubble rising, there is a large amount of speculative demand pouring into the market.
There is a large amount of speculative demand pouring into the market, which means that the supply will be amplified accordingly.
This is a very common feature of the foam formation process.
Since in the face of speculative demand, there is an abnormal amplification of supply,
When speculative demand disappears, the amplified supply will form a surplus, and this surplus needs to be removed.
This removal of excess means that the supply will return to an abnormally weak level.
And it will take a long time to remove the excess, plus the break of the lever.
So, in the process of the bubble bursting,
On the one hand, the removal of oversupply,
On the other hand, if the overleverage is removed, then the whole economy will be very painful and will last for a very long time.
To put it simply, it looks like this.
We can take a quick look at the situation in Japan.
Prior to 1986, under normal conditions, real estate investment accounted for only 8% of the economy.
In the process of bubbles, the proportion of real estate investment has risen from 8% to nearly 11% -
We are seeing a response to supply, which is expanding rapidly in the face of expanding demand.
Subsequently, after the bursting of the housing bubble, the excess supply needed to be removed.
The oversupply needs to be cleared, which means that investment has to fall below 8 per cent.
In fact, we saw that the removal of its supply dragged on until after 1997, when the supply fell below 8% of long-term GDP.
It took a long time to stabilize, starting to stabilize after 2003, and the level of stabilization was 6.5% of GDP.
It's about 1.5 percentage points below its previous level, but it's mostly stable.
It took about 12 or 13 years from the beginning of the oversupply to the complete elimination of the oversupply in 2003.
The very serious purging of the oversupply in it began after 1998.
The 1998 financial crisis in Japan was the real beginning of the purge of its supply.
And before that, the removal of supply was all the banks holding there, holding on to their balance sheets, taking the money, so the excess supply has been maintained.
This is the case in Japan, and the situation in the United States is similar.
In the United States, before 2002, real estate investment accounted for about 8% of GDP.
After 2003 and 2004, this proportion increased rapidly.
This rapid rise is a response to supply during the bubble process, and then begins to decline rapidly after the bubble bursts.
The difference between the U.S. and Japan is that as soon as the bubble bursts, supply begins to clear immediately, while Japan has been dragging its feet for at least six years.
After 2014, this purge process was basically over.
Real estate investment is back to a more normal level, which is 7%, which is about a percentage point lower than before the bubble.
If we take 2013 and 2014, when the real estate investment market began to return to normal, it took about five or six years compared to the bursting of the bubble.
If Japan was cleared from 1998 to 2013, it took five or six years.
So in the process, there's not much work you can actually do, because the oversupply, the break of the lever, it takes a lot of things to remove.
Actually, if we look at the situation in Spain, it's the same.
It has a massive build-up of oversupply, which then needs to be cleared, and it takes a long time to clear and then it starts to stabilize.
It has experienced severe overshoot
There is no excess supply in the real estate market
Let's look at China.
In the process of the accumulation and subsequent bursting of China's housing bubble, the accumulation of oversupply in China is largely invisible.
China's real estate investment peaked in 2013 as a percentage of GDP.
After 2013, the share of real estate investment in the overall economy began to decline rapidly, and may fall to around 5.5% by 2024.
During the 2016, 2017, 2018, and 2019 rounds of real estate bubbles, the build-up of oversupply was extremely minor, if any, when it existed.
Even if it has an oversupply, it lasts very short and is very slight.
But then, after 2021, the oversupply was cleared extremely completely, and the magnitude of the excess was reduced by an extremely complete amount.
From the level of oversupply, we can see that it is very different from some typical real estate bubbles -
The oversupply is extremely insignificant, and the elimination of the oversupply is extremely thorough, very fast, and very large.
In fact, I have always believed that the real estate market does not have an oversupply, but it has undergone a serious correction, and this correction has a serious overshoot.
This is the first level of stuff that I want to share with you.
When the traditional bubble bursts
Trading volumes have shrunk dramatically
The second level of stuff,
We look at the transaction volume, we look at the situation in the United States, we focus on the second-hand housing.
Why observe second-hand housing?
Because after the bubble burst, the first-hand housing market disappeared, real estate companies closed their doors, and the first-hand housing market was almost no longer traded, but the second-hand housing market was not affected by this.
Especially after the bubble burst, a large amount of demand has been transferred from first-hand houses to second-hand houses, which actually helps to push up the transaction volume of second-hand houses.
Under these conditions, the conclusions we make about the observation of second-hand housing are actually conservative.
We see that in the process of bubble in the United States, the transaction volume of second-hand housing has rapidly expanded, about 40%.
However, after the bubble burst, the transaction volume of second-hand housing was basically discounted, or slightly higher.
This was followed by a long hold at the bottom.
Just like the data we just saw in investing,
After 2013, the transaction volume of second-hand housing in the United States basically returned to normal levels, and investment began to return to normal.
And in the process, we look at 2009, 2010 it has a sharp fluctuation,
We checked the data for this drastic fluctuation, mainly foreclosure,
It's that the landlord can't afford the mortgage, and the bank takes this out, either sells it directly, or pushes the house outright, and it brings about a lot of foreclosures.
On the annual data, it actually continues to fall and remains at a very low level.
This is consistent with the data that we see at the investment level.
We see that the situation in Spain is the same, both in terms of the duration of the real estate and the adjustment of the second-hand housing market.
We look at the situation in the Netherlands is the same, and we look at the situation in the United Kingdom.
In most cases, the conclusions we observed in the second-hand housing market are similar.
That is, the transaction volume has shrunk sharply, and the transaction volume of second-hand housing will shrink by about half, some may be three or four percent, and some will shrink by about half.
Then it will last for five or six years at the bottom before it gradually returns to normal.
Second-hand housing transaction volume in second-tier cities
In 2023, it is an all-time high
Let's look at the situation in China.
Transactions of new and second-hand houses in China's 13 cities.
These thirteen cities include some large cities, as well as many smaller cities.
The reason why these thirteen cities are,
It is because the data of these thirteen cities is directly disclosed by the relevant local governments and is based on the transfer of ownership, so it is extremely accurate.
Let's look at the first-hand house,
After 2021, the transaction volume of first-hand homes in these cities will continue to shrink, and by 2023, it will shrink to about 7% off.
However, the second-hand housing transactions in the thirteen cities will increase significantly in 2023.
The number of second-hand home transactions actually fell for only one year in 2022, followed by a significant increase in 2023.
This volume is a double-digit expansion.
Even if the transaction volume of second-hand housing in 2020 is the peak, the transaction volume of second-hand housing has only declined for two years, and then it has increased significantly.
Let's look at a larger caliber of data.
This is the data of CRC's 30 cities, which are basically second-tier cities in China.
The number of second-hand home transactions in China's second-tier cities hit a record high in 2023.
On the basis of the continuous shrinkage of the first-hand house, which is about 7% off relative to the top,
The transaction volume of second-hand homes was only discounted by 20% in 2022, and then significantly increased in 2023, hitting a record high.
This is a much larger caliber data.
We use data of different calibers and see the same picture.
If we look at the data across the country and extrapolate based on some very conservative assumptions,
Nationally, the number of second-hand home transactions increased by at least 15% in 2023.
Under other easing assumptions, it may have risen by 30%.
Under the condition that the first-hand house continues to shrink by 8%, the second-hand housing transaction will increase significantly in 2023.
And it has hit record highs in some calibers, and there are also double-digit volumes in others.
This is very different from the market correction process that occurs when most bubbles burst.
Price correction in China's second-hand housing market
It's almost done in 2023
We face two problems,
The first question is, why is there such a large volume of second-hand housing?
The second question is, why is the performance of second-hand homes so different from first-hand homes?
Let's take a closer look at the data.
This is an index of the prices and rents of second-hand homes in 25 cities based on third-party intermediaries.
Among them, 100 in November 2018,
Shell's 25 cities do not include Beijing, Shanghai and Shenzhen,
But it includes Guangzhou, including all the provincial capitals of the head, Nanjing, Hangzhou, etc., so it is a representative of China's second-tier cities or provincial capitals.
So judging from the data of Shell, on a rent-based basis, because of the serious impact of the epidemic, the rental market has shrunk severely.
It will continue to shrink after 2021, 2022, and 2023, and it will be about 9% off compared to November 2018.
Let's take a look at the selling prices of homes in 25 cities.
Residential selling prices, which rose by 8% in 2021 and 2020, when the widely regarded bubble was the last hit, rose by 8% against the backdrop of falling residential rents.
Rents fell by 10 per cent, but the price of housing rose by 8 per cent.
So valuations have risen sharply, and the rise in prices has seriously deviated from fundamentals.
Then after the end of 2021, housing prices in 25 cities began to fall, falling by nearly 20% so far.
It was its price index, which fell by 20% from the top.
Down 20%, what is the concept now?
That is, the absolute index of house prices in 25 cities is already seriously below the level of November 2018.
The absolute level of house prices has fallen to the level of 2017, or the level of 2017-2018.
Valuations of home prices relative to rents have fallen to slightly better than they were in the second half of 2018.
This can also add two concepts,
From 2018 to the present, residents' disposable income has increased by 30%,
This means that if we calculate the house-price-to-income ratio, the price-to-income ratio in China's second-tier cities has now fallen to the level of 2016.
So, we can roughly say,
Now that the real estate market has been correcting for two years, rental yields have returned to mid-2018 levels, and the house-price-to-income ratio has returned to pre-2017 levels.
If we consider the affordability of the loan.
The bad news given the affordability of loans is that people expect incomes to fall, which is bad news.
The good news is that mortgage rates are much lower now than they were then.
Take into account that mortgage rates are much lower than they were back then, and if you calculate a real estate loan based on an 8-year duration.
Then the curve of change in the relative income of the monthly mortgage payment in the future is the same as in 2017.
And 2016 and 2017 were the latest starting points for the real estate bubble and price increase process.
At the beginning of 2016, three went to one drop and one made up, one of which was to reduce real estate inventory.
In our comparison, we see that on many indicators,
Valuations in the residential market in second-tier cities have returned to the levels of the early days of this bubble process, or slightly later than in the early days.
At that time, it was at the beginning of the bubble process, which means that the valuation was low at that time.
If the enlargement of the second-hand housing transaction volume, there is no surplus at the macro level, and the change in valuation at the micro level is combined,
Our basic conclusion is that
The correction of the price of China's second-hand housing market has been basically completed in 2023.
The implication is that China's housing market has experienced a brief price correction of bubbles, rather than the bursting of a bubble.
If it was a bubble burst, all its performance was not like this, and it experienced a price correction.
Why is the price correcting?
Rents are falling and income expectations are falling due to the pandemic, but house prices continue to rise for some time.
So, asset prices are detached from fundamentals.
The decline in rents and expected income is related to the epidemic, which no one expected.
In the face of this fundamental, asset prices need to be revised downward,
The downward revision of asset prices is basically over by the end of 2023 in 25 cities.
Or let's be conservative, that is, the price has completely returned to a reasonable range.
The market is in this position and has strong support.
The precondition is that there can be no more new round of epidemics, no more new round of global financial tsunami, and no more new round of serious economic stalls.
First-hand housing market
Three reasons for continued shrinkage
With that, let's respond to the second question,
Why is the first-hand housing market shrinking?
There are three reasons for this.
The first reason is the price limit of the first-hand housing market.
The price of second-hand housing can fall freely, it falls to a reasonable range, and the transaction volume is released.
In the first-hand housing market, the price is limited for various reasons, and the price cannot fall through, and the transaction volume cannot be released.
The market will not be able to function normally, and the entire adjustment process will not be completed smoothly and thoroughly.
The second reason is that the first-hand housing market has a growing risk of delivery.
I finally bought it with millions of hard work, but after a few days, I said that I couldn't pay it, and there was no deadline, which is very different from the second-hand housing market.
The third problem is that the supply of first-hand housing is shrinking too quickly.
You want to buy a building within the second ring road of Beijing, there is no new property, you can't buy it,
But this was not the case before, and developers massively cut the start of construction.
Therefore, the problem of the first-hand housing market is the tightening of supply, serious delivery risks, and incomplete price adjustment.
Or we can put it another way, taking into account the price limit of the first-hand house, and under the condition that the delivery risk can be completely eliminated,
The adjustment of the price of first-hand houses, I personally think, has been completed more than half or more than half,
However, there is still a need for policies to guide the price of the first-hand housing market to continue to adjust downward.
If in 2024, first-hand houses can be like second-hand houses, and the price continues to fall with a more obvious correction.
Then the adjustment process of the entire market can basically be over.
So in this sense, I think that the core issue of current macroeconomic policy may not be the amount of social finance, the amount of deficit, it is not the problem.
The core issue is that we need to restore the function of the first-hand housing market as soon as possible.
The good news is that, in my personal opinion, China's real estate market is experiencing a price correction after a deterioration in fundamentals, rather than a bubble bursting.
In the second-hand housing market, we are already seeing more certain signs that the price correction is over.
And the price correction will take much faster than many pessimists fear.
It has only experienced one round of decline in 2022 and 2023, and in 2 years, basically the 20% decline is basically over.