China's great real-estate bust has begun, says Nomura. A combination of a huge oversupply of housing and a shortage of developer financing is producing a housing market downturn that could drive China's GDP to less than 6% this year.
'To us, it is no longer a question of 'if' but rather 'how severe' the property market correction will be,' three Nomura analysts wrote in a report released Monday. And there isn't much the government can do to head off problems.
'There is no policy that is universally right,' says Nomura analyst Zhiwei Zhang.
For some time, Nomura has been among the most bearish of the big investment houses when it comes to China. And it has made some gutsy calls, although they haven't always turned out to be right. In early April, for instance, Nomura forecast that China's current account--the widest measure of trade--would be in the red in the first quarter of 2014. When the numbers came in recently, China still had a current account surplus, though at $7 billion, it was the smallest quarterly surplus in three years.
So it remains to be seen whether Nomura this time will be Paul Revere warning of trouble ahead or Chicken Little, warning of trouble that never seems to occur.
Nomura bases a lot of its argument on the observation that that property investment turned negative in four of China's 26 provinces in the first quarter of 2014, and in two of them, Heilongjiang and Jilin, the fall was greater than 25%. To Nomura, that's a warning sign of similar problems to come in other Chinese provinces.
Falling investment leads to falling levels of construction and sales. And given the property market's huge role in the Chinese economy, declining growth in the property sector means declining growth in GDP.
In one regard, Nomura may be conservative. It estimates that real estate and related industries, such as steel and cement, account for 16% of China's GDP. Other economists put the figure at around 25%.
Shortly after Nomura released its report, UBS came in with its own real-estate assessment, which was also a downer, but less so. The 'government still has the means and willingness to mitigate a property downturn,' UBS said. Those policies include increasing infrastructure investment and relaxing property policies. Even so, UBS downgraded its 2014 forecast to 7.3% from 7.5% and its 2015 forecast to 6.8% from 7% to reflect its worries about the property sector.
Certainly, the news in the real-estate sector hasn't been good this year--although a number of analysts still expect China to make the government's GDP target of 7.5% growth.
Private data provider China Real Estate Index System said property sales by volume in the 44 cities they track fell 9% in April from the prior month and 19% compared with a year earlier. Average home prices, meanwhile, rose 0.1% in April from March and 9.1% from a year earlier. The sequential gains were the lowest since mid-2012, when the housing market turned around after the last downturn. This price index started only in 2010.
The government has lousy policy choices, Nomura argues. Continue with minimal stimulus and GDP growth could fall below 6% this year. On the plus side, developers wouldn't add much to China's long-term housing and debt problems.
Alternatively, ramp up monetary and fiscal policy by, say, cutting by 0.5% the reserves that banks hold in the central bank and by turbo-charging government spending, and the government could achieve 7.4% growth this year, Nomura estimates.
But taking that route would only worsen China's housing glut and delay the downturn by a year, the investment firm argues. In 2015, Nomura estimates, GDP would slow to 6.8%. While delaying problems for a year could give leaders more time to put in place reforms that could help China over the long term, Nomura also says China would have a one-in-three chance of GDP growth falling even faster by the end of 2015 and starting a 'hard landing,' which it defines as four consecutive quarters of GDP growth below 5%.
Damned if you do and damned if you don't.
It's possible China could get some unexpected good news that lifts the economy. The downturn in the housing market could turn out to be more gradual than Nomura expects or the global economy could turn around and give a big boost to exports. But Mr. Zhang isn't putting his bet on either. 'There isn't a panacea,' he says.
私营数据提供商中国房地产指数系统(China Real Estate Index System)公布，4月份该系统监测的44个主要城市房产累计成交面积环比下降9%，同比下降19%。该系统还公布，4月份全国100个城市（新建）住宅平均价格环比上涨0.1%，同比上涨9.1%，环比涨幅创2012年年中房价止跌以来的最低水平。中国房地产指数系统仅从2010年才开始发布“百城价格指数”。