It now appears that the Chinese real estate market will face an inevitable correction. Property prices in major metro areas have skyrocketed in the past decade, the result of a middle class that grew faster than available real estate, along with sky-high inflation statistics that make real estate an excellent store of value for Chinese investors.
In the future, one has to wonder whether a necessary correction in Chinese real estate could trigger a larger rally for silver and gold prices. Remember, it was only recently that gold contracts were available for purchase on the Chinese future markets—even as the government had touted precious metals as an excellent asset class.
Wealth Destruction isn’t Monetary Destruction
The important thing to remember with “bubbles” of any type is that the destruction of wealth and paper valuations is not monetary destruction. Homes in China are not highly levered borrowing mechanisms as they were in the United States at the height of the US real estate bubble in 2007. The capital lost in Chinese real estate is a majority of saved capital, not borrowed capital.
Analysts are projecting a declining real estate market of anywhere from 10% to 40% in the next year, a sign that wouldn’t be so ominous if it were for the fact that analyst are almost entirely aligned in their projections.
Housing sales, which indicate the amount of available liquidity in the market at current prices, continue to slow. Beijing’s new home sales metrics are off some 17% from the same period last year, while current inventories total up to 22 months of current demand. This is the same trend that appeared as housing made its peak in the United States.
New Inflation Protection?
Knowing that the value of housing in major Chinese cities will be on the decline—or, at the very least, stall—the reliance on real estate as a store of value may shift. Investors just might find that the real estate prices in most cities are far too high, and more importantly, not as good of an investment relative to commodities, which have been a Chinese favorite in recent years.
In September, the Chinese imported a record 56.9 tonnes of gold, six times more than average.
It would be in poor form to say that the Chinese real estate market could swing the nation into recession. Instead, it has been the government’s vast manipulation in the credit markets that have created such an adverse effect. Reducing the amount of capital required to purchase a home would be a very good step in allowing the real estate market to find a soft bottom.
For others, however, confidence is likely already lost. Now that Chinese citizens are becoming used to the concept that real estate is not forever inflation resistance, precious metals may soon take the stage as the most liquid, anti-inflationary investment available to local residents. Such a realization would undoubted be positive, as the Chinese massive annual trade surplus suggests the nation can easily afford much of the bullion available for sale. The question is, will you buy before China does?