Friday, September 19, 2014
My Account  | Login
Nashua;40.0;http://forecast.weather.gov/images/wtf/small/nskc.png;2014-09-19 05:45:37
Sunday, June 22, 2014

China’s housing may follow in US footsteps

Tony Paradiso

The real estate market is a frequent topic of this column, and that includes the housing market in China. An initial reaction to any discussion of Chinese real estate could be, who cares? Why should we have sympathy for the Chinese if they should suffer the same fate that we’ve recently suffered?

I don’t lose any sleep over whether someone living in China loses money on a home purchase. What does make me restless is the possibility that the Chinese economy could suffer the same fate as our economy if their housing bubble bursts. ...

Sign up to continue

Print subscriber?    Sign up for Full Access!

Please sign up for as low as 36 cents per day to continue viewing our website.

Digital subscribers receive

  • Unlimited access to all stories from nashuatelegraph.com on your computer, tablet or smart phone.
  • Access nashuatelegraph.com, view our digital edition or use our Full Access apps.
  • Get more information at nashuatelegraph.com/fullaccess
Sign up or Login

The real estate market is a frequent topic of this column, and that includes the housing market in China. An initial reaction to any discussion of Chinese real estate could be, who cares? Why should we have sympathy for the Chinese if they should suffer the same fate that we’ve recently suffered?

I don’t lose any sleep over whether someone living in China loses money on a home purchase. What does make me restless is the possibility that the Chinese economy could suffer the same fate as our economy if their housing bubble bursts.

Housing’s contribution to the Chinese economy has grown substantially since 2006. Direct housing construction has risen from 6 percent of total Chinese economic activity to 10 percent in 2013. During the same period, the contribution of indirect housing construction grew from 2 percent to 7 percent. And the housing wealth effect has grown from 2 percent to 5 percent. That brings housing’s total contribution to China’s economy to 22 percent.

Coincidentally, that is the exact percentage housing contributed to the U.S. economy in 2006. Any guesses on what housing adds to our economy today? The answer is 8 percent. That data point pretty much takes the mystery out of why our recovery has been so lethargic. Also coincidentally, housing’s contribution to the Chinese economy in 2006 was 10 percent. Talk about trading places.

The latest disconcerting news regarding the topic came last Wednesday when government data showed that average new home prices in 70 Chinese cities fell 0.15 percent month-over-month in May. That doesn’t sound like much of a drop but when your real estate market is driven by the belief that property values only go one way, well, you know what that can lead to.

And as we’ve experienced, housing drives the sale of many other products. According to the National Bureau of Statistics, Chinese furniture sales have grown an enviable 14.7 percent so far this year. One would normally be ecstatic over such growth until you compare it to the 21 percent increase in the same period last year. A similar impact has been felt in appliance sales. They’ve dropped from 21.5 percent in 2013 to 7.3 percent this year.

Naturally, analysts are split on whether the downturn is temporary or a sign of a continuing problem. As for me, predicting the direction of China’s real estate market is above my pay grade, but what I do know is that it’s worth keeping a close eye on. If future data shows further declines, expect the impact to start being felt within our borders.

As for the domestic housing market, alarms are sounding in certain circles. The pace of price increases has slowed. That in itself is not surprising or alarming. The rub is that the increases are not being driven by increased demand but by tighter supplies.

And the tighter supplies are not just the result of reduced construction activity. Homes have now followed in the footsteps of every other product produced: they are becoming obsolete. Mark Fleming of CoreLogic defines “obsolete” housing as homes that possess undesired amenities or are located in unpopular locations.

If you’re a glass half full person, tighter inventories are a positive factor since it might spur added construction. But the glass half empty folks believe that the lackluster demand points to further pricing declines. For me, it’s a coin flip.

Entering the year, I had predicted that “real” home buyers would pick up the slack caused by a decline in investor interest. So far this year, it would be hard to argue for the accuracy of that prediction. Granted, the winter was a nightmare for every aspect of the economy. But if the real estate market doesn’t re-accelerate in this – and the next quarter – we could be in for a rocky economic ride.

It wasn’t long ago that the financial world would virtually come to halt waiting to see what the Ben Bernanke-led Federal Reserve had to say.

Under Janet Yellen’s leadership, Fed meetings haven’t held the same level of interest. But Ms. Yellen shouldn’t take it personally. It’s a good thing when Fed meetings can come and go with little notice.

And it isn’t as if the markets are completely ambivalent. The Fed’s proclamations following last week’s two-day meeting did cause a modest stock rally.

“Economic activity is rebounding in the current quarter and will continue to expand at a moderate pace thereafter,” Ms. Yellen said.

Really? That’s the best you could come up with?

How could activity not pick up after a first quarter that contracted 1.0 percent?

Yellen did say that we should see faster growth in 2015 and 2016. Of course, that’s exactly the same thing that the Fed predicted for this year before they lowered their forecast for the year to 2.1 to 2.3 percent from a previous expectation of 2.8 to 3.0 percent.

So why did the markets rally?

For the same reason they’ve rallied for years: The free money train will continue to roll into 2015. This, despite the recent signs of rising inflation. Then again, the Fed hasn’t had to concern itself with inflation for so long that perhaps it has forgotten what to look for.

Author, professor, entrepreneur, radio and TV commentator Tony Paradiso can be reached at
tparadiso@tds.net.