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Same story has been foretold over and over for the last 30 years. I will believe it when I see it. The RE bubble is bad but substantially less bad than what t

by jpgvm 4y ago

Same story has been foretold over and over for the last 30 years. I will believe it when I see it. The RE bubble is bad but substantially less bad than what the US was facing in 2008. There is a big difference between over-leveraged developers (the Chinese problem) and rotten Main street banks (which was the US problem). In China's case we are likely going to see a continued drop in housing prices for a little bit longer until they plateau. However they are unlikely to see growth again for a long time unless Chinese government changes tact. This isn't a bad thing as right now Chinese homes are some of the most unaffordable on the planet, especially in desirable cities. Also it will lead to speculation and investment moving outside of RE and into other vehicles like equities which will improve the breadth and quality of Chinese financial markets. The other bad things that will happen is construction companies will likely be in distress, large infrastructure projects/spending directed by the CCP will save the good ones but there will be a bunch of consolidation and downsizing. Not a particularly bad thing given the changing population dynamics probably requiring the construction of less housing than previously. Impact is unlikely to spread beyond RE because of how compartmentalized funding is in China. The government controls all the major banks and as a result they run under very low-risk capital regimes. It's much more likely the big financial fallout will be from foreign investors that were greedily holding onto risky Chinese commercial paper. All-in-all I actually suspect this to go out with a whimper rather than a bang. The way systems are setup in China there just isn't really the potential for a bang outside of like big social issues causing a revolution or something but generally speaking that doesn't happen. Usually as dissent grows they recognize it won't go away and start doing something to appease the people. Recent example being their effort to deal with pollution in the major cities, etc. So yeah. I get that Western folks, Americans in particular don't understand the Chinese system and wish ill will upon it but the reality is that it's a lot more robust than said folks give it credit so don't bet on it failing anytime soon.

atwood22 4y ago
How are over-leveraged developers that different from what caused the 2008 global financial crisis? The cause of the GFC was that assets were labeled as safe but were in fact unsafe. So one day everyone woke up and had less money than they thought they had. The same thing can happen from over-leveraged developers. Banks lend money to people to buy real-estate. Everyone expects those units to exist, and if they suddenly don't exist en-masse, then that's going to be a major shock.
- jpgvm 4y ago
  It matters because of contagion. As it stands there are individuals at risk of being over-leveraged by having a loan on a asset that doesn't currently exist (but probably will, CCP has a way of compelling such things to happen) or has dropped in value compared to when they bought it (most likely). Developers and construction companies are also in hot water as their business models relied on continually pre-selling apartments to provide liquidity for their operations. This is where the similarities end vs 2008. The main issue with 2008 wasn't the housing bubble itself, such bubbles are normal and happen all the time. The issue was the extent of the financial over-leveraging (due to deregulation) by the financial firms which threatened the solvency of Main st and Wall st banks alike and the incentives that came out of the synthetic financial products that were engineered over baskets of mortgages. Namely a reduction in qualification for sub-prime loans and increased incentives to offer variable rate mortgages with cliff clauses + continual refinancing + speculation + flipping etc. Essentially normal people losing their house == expected (though sad still) and would have caused a moderate recession (again, expected). However because of how overleveraged the banks themselves were they collapsed, this spread (contagion) to pension funds, equities, everywhere essentially and because these assets and positions in the funds and banks were held across the world it resulted in the -global- financial crisis rather than a contained RE bubble popping.
  - jollybean 4y ago
    Yeah, dude, the number of 'normal people losing their homes' will create a revolution, and/or, consumer spending will crash, combined with the fact that a 'major component of GDP has crashed' (i.e. construction), that's 'extremely bad'. The US was able to 'rebalance' by propping up some banks - but in reality they saved 'consumers' by taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet. CCP can't really do that for houses that are not built. The other issue is the size of that part of the economy in relative terms. This is is not going to 'blow over' - everything, including Xi's totalitarian takeover, increased control and repression, issue of age, diminishing marginal returns to growth ... ... this adds up to a 'major shift' in what China is. We saw a different China in the 1990s (quietly building), 2000's (onto the world stage), 2010 trying to be a global superpower, threatening Taiwan, occupying S. China Sea etc, and now 2020's 'reckoning /rebalancing'.
marianatom 4y ago
Right so I had similar vein of thoughts years ago when I thought China was in a real estate bubble and did think that the government can just make certain type of investors take the loss and move on. However, that's only if the collapse is only in real estate. What I'm seeing right now with China is a death spiral, namely bad policies such as zero covid, tech crackdown, or not resolving the root of real estate crisis -> investor (domestic and foreign) loss of confidence -> companies leaving or shut down -> rising unemployment or reduced salary -> debt bubble gets bigger -> bad policies. This death spiral is enhanced by demographics collapse which is happening now, not 30 or 15 or 10 years ago, as well as nationalistic behaviors that isolates China. Not to mention global inflation and consumer demand collapse. In my list of things I also didn't mention * 20% unemployment rate for new grads * layoffs from big tech companies * 70% of China's economy is real estate related, which means China will take an even bigger impact from real estate collapse than other countries that have less % of economy in real estate. * collapse in demand for real estate due to fast aging population * 20% of built real estate stays empty (not even rented) due to investment vehicles purpose

by jpgvm 4y ago

atwood22 4y ago

How are over-leveraged developers that different from what caused the 2008 global financial crisis? The cause of the GFC was that assets were labeled as safe but were in fact unsafe. So one day everyone woke up and had less money than they thought they had. The same thing can happen from over-leveraged developers. Banks lend money to people to buy real-estate. Everyone expects those units to exist, and if they suddenly don't exist en-masse, then that's going to be a major shock.

jpgvm 4y ago
It matters because of contagion. As it stands there are individuals at risk of being over-leveraged by having a loan on a asset that doesn't currently exist (but probably will, CCP has a way of compelling such things to happen) or has dropped in value compared to when they bought it (most likely). Developers and construction companies are also in hot water as their business models relied on continually pre-selling apartments to provide liquidity for their operations. This is where the similarities end vs 2008. The main issue with 2008 wasn't the housing bubble itself, such bubbles are normal and happen all the time. The issue was the extent of the financial over-leveraging (due to deregulation) by the financial firms which threatened the solvency of Main st and Wall st banks alike and the incentives that came out of the synthetic financial products that were engineered over baskets of mortgages. Namely a reduction in qualification for sub-prime loans and increased incentives to offer variable rate mortgages with cliff clauses + continual refinancing + speculation + flipping etc. Essentially normal people losing their house == expected (though sad still) and would have caused a moderate recession (again, expected). However because of how overleveraged the banks themselves were they collapsed, this spread (contagion) to pension funds, equities, everywhere essentially and because these assets and positions in the funds and banks were held across the world it resulted in the -global- financial crisis rather than a contained RE bubble popping.
- jollybean 4y ago
  Yeah, dude, the number of 'normal people losing their homes' will create a revolution, and/or, consumer spending will crash, combined with the fact that a 'major component of GDP has crashed' (i.e. construction), that's 'extremely bad'. The US was able to 'rebalance' by propping up some banks - but in reality they saved 'consumers' by taking toxic loan assets of banks balance sheet and absorbing it onto the fed balance sheet. CCP can't really do that for houses that are not built. The other issue is the size of that part of the economy in relative terms. This is is not going to 'blow over' - everything, including Xi's totalitarian takeover, increased control and repression, issue of age, diminishing marginal returns to growth ... ... this adds up to a 'major shift' in what China is. We saw a different China in the 1990s (quietly building), 2000's (onto the world stage), 2010 trying to be a global superpower, threatening Taiwan, occupying S. China Sea etc, and now 2020's 'reckoning /rebalancing'.

marianatom 4y ago

Right so I had similar vein of thoughts years ago when I thought China was in a real estate bubble and did think that the government can just make certain type of investors take the loss and move on. However, that's only if the collapse is only in real estate. What I'm seeing right now with China is a death spiral, namely bad policies such as zero covid, tech crackdown, or not resolving the root of real estate crisis -> investor (domestic and foreign) loss of confidence -> companies leaving or shut down -> rising unemployment or reduced salary -> debt bubble gets bigger -> bad policies. This death spiral is enhanced by demographics collapse which is happening now, not 30 or 15 or 10 years ago, as well as nationalistic behaviors that isolates China. Not to mention global inflation and consumer demand collapse. In my list of things I also didn't mention * 20% unemployment rate for new grads * layoffs from big tech companies * 70% of China's economy is real estate related, which means China will take an even bigger impact from real estate collapse than other countries that have less % of economy in real estate. * collapse in demand for real estate due to fast aging population * 20% of built real estate stays empty (not even rented) due to investment vehicles purpose