There’s a nice piece in the FT today on the Chinese real estate market. It quotes again the statistic about China consuming more cement in two or three years than the US had in the whole of the 20th century. The writer, Jamil Anderlini, points to the presence of a supply spike – of which the skyscraper curse tends to be the vanguard – and a financial crash.
Economists have long pondered the so-called skyscraper curse, the uncanny correlation between construction of the world’s tallest building and an accompanying financial crash. From the end of Roaring Twenties America to the bursting of the credit boom in the sands of the Gulf, the Empire State Building (started in 1930), Sears Tower (started in 1970), Petronas Towers (completed in 1996) and the Burj Khalifa (completed in 2009) have foretold or coincided with crises — apparent signs that irrational exuberance can manifest itself in physical form.
Lots of the familiar transmission mechanisms between the banks, the macro-economy and the real estate development sector are set out. Jamil points to problems of under-reporting of excess supply but states that investment in real estate actually increased by 1% in 2015 (he points out that commodity import volumes also increased in 2015 – although because of falling prices, they fell in value terms). He’s strikes a pessimistic tone.
In other words, China’s economy has slowed by a couple of percentage points and global commodity prices have plummeted even before any correction in the country’s property sector begins in earnest. An outright decline in real estate investment, which is surely coming, will also have profound implications for the rickety, debt-laden Chinese financial system. Analysts estimate that more than 60 per cent of Chinese bank loans are directly or indirectly tied to real estate.
With a debt-to-GDP ratio that is higher than the US and Germany, serious trouble in the Chinese property sector would send shockwaves round the globe and make the recent fallout from declining Chinese currency and equity markets look like a minor squall.
I hadn’t appreciated that supply was still growing. This quasi-doomsday scenario has been speculated upon for a while now. It shouldn’t be a surprise if it does happen. China certainly wouldn’t be the first real estate market where a bubble has turned to bust with all sorts of fallout for banking systems, economic and capital market contagion etc. The key issue is the extent to which the Chinese state can manage a correction.