The Edmond Sun

Business

April 11, 2014

THE ASTUTE INVESTOR: Watch China for the next economic trigger

EDMOND — For my male readers out there, remember back to your teens and 20s when one of the primary goals was getting a date and finding a girlfriend? Oh come on! You can admit it.  Well imagine how it would have complicated matters if no woman would give you a second thought if you didn’t own property. No, not that old beat up car you drove and sometimes slept in. I mean real property, as in a house.

Well, that’s how life is if you are a young man in China. No property, no girlfriend, no wife. This is the consequence of China’s one child policy. If parents could only have one child, they went to extraordinary measures to make sure it was a boy. Because of that, young men now significantly outnumber young women — as many as 30 million more.

Welcome to China, home of the biggest real estate bubble in modern history. Home prices in Shenzhen — China’s largest coastal industrial city — are 35 times income! Can you imagine making $50,000 a year, yet having to pay $1.75 million for a condo? And the rest of China is not much better. Home prices in Beijing are 30 times income. In Shanghai and Guangzhou they’re 28 times income. That’s insane.

These numbers exceed the house-price ratio of all the major cities in the world. For example, in Hong Kong, home prices are “only” at 17 times income. In Mumbai, they’re at 19 times income. In London, now the most expensive city in the developed world, they’re at 15 times income. Even in Vancouver and Sydney they’re only at 11 and 9 times income, respectively.

Without a doubt, China’s real estate bubble is unsustainable. But it gets worse. Thanks to overbuilding, the bubble continues to inflate, despite massive vacancies in cities across the country. According to electricity-use surveys, average vacancies run at 27 percent.  Ordos, the infamous ghost town, is China’s poster child for the trouble brewing in paradise. The city was constructed in the central part of the country to accommodate one million people, yet it has only 70,000 residents. To put that in perspective, that would be like a city about the size of San Jose that is 93 percent vacant!

And Ordos isn’t the only one. Tianduncheng (meant to look like Paris, complete with a replica of the Eiffel Tower) stands totally empty and Chengdu’s New Century Global Center (the largest mall and building complex in the world) is also almost completely vacant. In fact, since 2001, China has been building houses at a much higher rate than households have been formed.

At the top of the last bubble (2005 to 2008), China was building five million homes a year, even though average annual household formation was just 2.6 million. But instead of scaling back when everything crashed, the Chinese went in the complete opposite direction. In 2011, there were 19 million housing starts, but only 5.8 million new households. That means nearly 70 percent of the new homes constructed that year alone were completely unnecessary!

Why should we care? China’s real estate market is on the verge of utter ruin and this is a problem for all of us. When, not if, their property bubble bursts, it will send a shockwave across the world. First to suffer will be its citizens. That’s because the Chinese love real estate. Like art, it’s their investment of choice. In the second quarter of 2012, 53 percent of home purchases were for investment.

The Chinese have the highest level of home ownership in the world. Rural people have 92.6 percent ownership, whereas urban people have 85.4 percent. It might seem odd that urban citizens have a lower home ownership rate, but with the cost of real estate in the cities, it’s not surprising.

Property investment is so entrenched in China’s culture that it directly impacts a man’s chances of finding a girlfriend and eventually a wife. Chinese women must marry up — in all regards. Their spouse must be taller, wealthier and more highly educated. He must also own a condo or some kind of real estate. No deed, no — well, you know. Millions of Chinese men are destined to remain single. And you thought dating was tough when you were younger?

The second to suffer will be everyone else, particularly the Pacific Rim economies of South Korea, Japan, Singapore, Australia and New Zealand. And of course, the U.S. economy and Europe.

China’s bubble burst will be the driving force behind the next global slowdown, thanks to its close connection to the world of commodities. The country has pursued its emerging-country strategy for twice as long and twice as intensely as its failed counterparts, building more than twice as big a bubble. This leaves China caught in a vicious cycle.

With falling commodity prices hurting the exports and best jobs of resource-exporting emerging markets, they’ll reduce their demand for goods from China. China is then forced to reduce commodity purchases from these emerging markets, putting additional downward pressure on commodity prices, creating the vicious cycle. And here in the U.S. we’ll feel the impact in rising interest rates. As the crisis unfolds, China and the emerging markets will be forced to reduce their foreign currency reserves. They’ll buy less U.S. Treasury bonds, and that will help drive up interest rates in addition to our new tapering policies.

And then what was that puff of smoke? You got it — the fragile U.S. economic recovery.  When will all this happen? Beats me, but the course is set for China. My advice: Watch what goes on in China. It’s important. Thanks for reading.

NICK MASSEY is a financial adviser and president of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Investment advice offered through Householder Group Estate and Retirement Specialists, a registered investment adviser.

 

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