China's Property Sector Now In Depression
The Chinese real estate sector made news starting last year. Sadly, it is not done with the headlines.
We are looking at a situation that is getting very bad. For the first time in a long time, we are seeing a global real estate market that is contracting. The depth of the drop remains to be seen.
At the head of the class is China.
This is a situation that just keeps getting deeper. It is now to the point that the industry is in a depression.
Will this spread to the rest of the world? Only time will tell. However, we know this is going to have a severe impact upon things.
Source
96% Drop In Profits
Country Garden was ranked as the top property developer in China for years. Unlike Evergrande, which was large but not as highly regarded, this is the crown gem when it comes to Chinese real estate development.
This is also what makes the dagger strike so deep.
The most recent filings reveal a 96% drop in profits during the first half of the years. That is not a typo. We are not looking at 10% or 20%. Instead, almost all the profitability is gone.
The Guangdong-based company said the market has struggled with weakening expectations, sluggish demand and declines in property prices.
“All these exert mounting pressure on all participants in the property market, which has slid rapidly into severe depression,” the company said. It added that the resurgence of Covid-19 in cities across China has also slowed construction activity and weighed on its performance.
Here we see the D-word. It was not spun by some reporter. The company itself is admitting as such.
Let us see the stark contrast between the two years.
Country Garden eked out a small profit equivalent to $89 million, versus $2.2 billion in the first six months of 2021.
From $2.2 billion to $89 million. That is quite a hit. At least the company was in the green. The same cannot be said for others such as Evergrande.
If we will recall, we covered how they failed to make their external debt payments. By defaulting, they send the entire industry is a swoon.
More than 30 Chinese real-estate companies, including China Evergrande Group and Sunac China Holdings Ltd., have already defaulted on their international debt. Many privately run developers this month issued profit warnings; some said they are expecting a more-than-90% decrease in net profit, and a few are expecting to post losses.
If the best in an industry is seeing its numbers crushed, this does not bode well for the rest of the participants.
Real Estate Is A Large Part Of The Economy
The challenge with real estate is that, in most countries, it is a large part of the economy. We know the tentacles run far when it comes to economic impact. Everyone from lenders to those supplying window dressing are dependent upon this sector. We also see the fact that many use their home to finance cars and vacations only enhancing the reach.
Now that things are turning in many nations, we are looking at major hits economically. In China, real estate was said to account for 30% of the countries GDP. What does it say when that industry is in a self-named depression?
If 30% of China's economy is in depression, there is no way the overall is not severely affected.
Of course, if we step back, we are discussed the second largest economy in the world. If China slips into a deep recession, how is the rest of the world going to fare?
Sadly, we already have our answer. Europe is close to dropping into a deep recession and the US just had back-to-back quarters of negative growth. While the White House wants to bicker over technicalities, the reality is the US economy is taking on water just like these others.
We would be remiss if we didn't mention the US real estate market is not on fire either. There are sign that we could see a pullback, and a powerful one in some areas. The hit to the total is less than China, but it is still more than 15% of total GDP.
China is leading the way. The only question is how low it takes everyone?
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Something I didn't see you mention here is Canada. I saw them as particularly vulnerable due to the multiple between median yearly salary and median home prices quite a few years ago now. We've followed suit here to a certain extent, but I do believe they've continued to outpace us on this metric, and save for some local markets, our real estate market isn't as heavily dependent on foreign capital inflows.
This made it difficult to anticipate which market would have a pullback first, Canada or China, but I guess we're seeing China go first now, which increases the likelihood that contagion begins to spread outside that market, simply due to its massive size economically. Look to Canada next as a bellwether to see if it's going to spread, especially considering that the Chinese are heavily invested there.
As far as Europe goes, the energy cost situation is completely out of control. I don't know if most people in the US can wrap their heads around the magnitude of what those people are facing this winter. If they don't work through their supply issues and their prices stay this high going into winter, forget about just economic hardship. We may see a humanitarian crisis in some of those countries. It gets very cold in some places every year, and all places some years, so depending on the weather this winter, it could get dicey. I would expect some money printing to compensate, which would damage the integrity of the Euro currency, which could then challenge the union itself, much more so than Brexit did. The currency has already taken a huge hit this year, so it wouldn't take much to send it into a tailspin as that situation develops.
Sorry for the long comment. Just thinking out loud. Interesting stuff.
Canada's real estate market has been in a bubble for nearly 40 years, as far as I know. The biggest reason is that Canada's government has not only allowed, but ENCOURAGED, foreign ownership of their domestic real estate. Just like Australia, they sold off all the valuable property to the Chinese.
Now the people of those two countries, respectively, are learning about the consequences of their governments' stupidity. They will not be able to ever afford to buy a house, and that causes inter-generational stagnation in wealth-creation and family-building.
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We Venezuelans have been fighting for years against something like this or worse, here the parallel dollar rises like crazy for two years seemed to have stabilized a little, but this whole scenario that you have raised, of which I did not know a good part, does the same in many countries and mine is no exception, now we must all tighten our pants because the lean season is coming again.
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I think this is starting to go beyond China, housing has screwed me. I've been building for 3 years now and still having issues. Many more companies have collapsed and many have lost their homes. I'm in a more lucky position where my home is near completion. But I think the broader housing market will start to enter a depression.
My particular annoyance is that housing prices have increased dramatically, with everything else, which means that my property taxes are increasing as well. My paycheck, on the other hand, has not budged.
If we do head into deflation, I'm willing to bet that my taxable property value won't go down.
The taxable value will go up so long as your local and state governments MAKE it :) The only reason property values go up is because of government greed. After all, the government appraisers and assessors are who DETERMINE how much protection money they owe you - otherwise, fuck your house, they'll steal it just like they have in every single economic downturn since 1913.
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I think it will affect things everywhere but I don't think it will happen right away. It will take time until things hit the rest of the world. After all, I am not surprised to see a lot of funds take a large hit because there is a lot of money invested into the real estate market in China.
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I guess the Chinese economy is collapsing!
I don't even want to think about such a possibility. After the pandemic, the #Turkish #economy is getting worse day by day. If the Chinese #economy gets worse, it will definitely affect us negatively.
80%+ hyperinflation in the Turkish Lira vs the USD, no thanks! I feel that Turkey will either end in a violent bloody coup, or there will no longer be a domestic currency to speak of. Can you say CBDC?
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Seeing these data, the real estate economy has contracted quite a bit in the last year, even the largest companies are feeling the rigor
30% in a depression will take the country into a depression as that is a big hit and this is not a ripple.
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Yep, saw it all coming years ago. When I learned about the 55 million vacant housing units in China, I knew what was going to eventually happen. The American builders did this EXACT thing, in the US, but with commercial real estate. Building spec and then the buildings lay vacant for years, despite a supposedly "hot" market.
Canada is in far worse shape than the US, as is Australia. Neither economy has real domestic manufacturing to speak of. Construction and real estate IS their economy. Without indefinite growth in property values, the governments of those two countries (and the US) will not take as much "revenue" (aka stolen money) through property tax extortion, and then they will raise other taxes to compensate, but they'll over-compensate, and the people will continually be robbed of their purchasing power until there is nothing left and pushing cashless CBDC systems will be easy as cake.
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