Real estate values have begun to drop sharply in China. Some economists may argue that this will undermine the central government’s plan to stage a “soft landing” in which GDP slows to 7% or 8% from recent rates of nearly 10%. Whatever the impact may be, China’s National Statistics Bureau reports that home prices only rose during December in two of the 70 cities it measures. Prices in 52 of those markets fell. China’s real estate situation has begun to resemble the one in the U.S. in 2007.
There are no ready statistics about how much equity the Chinese can take out of their homes directly, as Americans could do with home equity loans. Suffice it to say that people with home values well in excess of mortgage values are likely to use their incomes for consumer spending, at least in contrast to people with underwater mortgages. There is not enough data from China to show whether many of the mortgages there are underwater or headed in that direction. It does not matter much. Falling home values are a threat to consumer activity as owners grow cautious about the future, at least if the U.S. is an indication.
So far, China’s home value declines may not be married with high unemployment as has been the case in the U.S. for nearly four years. That double weight undermined consumer activity enough to cause GDP contraction. China’s employment figures are not considered reliable. From outside the country, a home price and unemployment pairing cannot be measured.
What can be measured is the slowdown in China’s manufacturing activity and its GDP. China’s central government also has eased monetary policy, a sign of concern about expansion. Contractions of factory activity in a country as dependent on it as China is almost certainly means that employment prospects are not strong. The trouble is magnified by the number of people who have relocated to large cities. New data shows that, for the first time, more Chinese live in cities than in rural areas. Most large Chinese cities have been built to accommodate the country’s expanding factory base.
One half of the trouble that ruined the U.S. economy — housing — is in place in China. The other — unemployment — may have begun or will soon. What might have been a soft landing is about to get hard.
Douglas A. McIntyre