Real estate truly drives Chinese economic growth with 20% of GDP associated with that part of the economy. These numbers should be tracked by any global macro investor. This high percentage of GDP makes perfect sense given the huge movements in population from rural to urban centers and the corresponding increase in wealth both created and moved into real estate and housing. Nowhere is the combination of demographics and population movement so important to economic growth, yet the critical importance of housing is still not fully registered by investors. There has been the consistent talk about a real estate bubble and ghost cities, but real estate still is a key driver in wealth creation and consumer spending. Unfortunately, much of the negative talk is starting to be realized, albeit slowly, in prices.
Housing prices have turned negative in the Fall and real estate investment has fallen by over 50% and is now significantly lower than infrastructure investment. Residential floor plans declined 26.8% and property values declined 1.9%, the first outright decline since December 1999. Like any levered economy we have to look at the distribution of wealth and how consumption will be affected by changes in wealth. The link between wealth effects and spending is not clear, but a real estate slowdown may tighten spending behavior especially on higher-end consumption. There has been a clear switch from real estate to the stock market for speculative behavior. In spite of loosening monetary policy, the money flows seem to be moving towards stocks and not real estate
Fourth quarter GDP came close to expectations at 7.3%. This is good but at the low end of growth over the last few years. Monetary policy is driven to control the path of real estate.The impact of the US housing sector stirs market reaction more than China and this is a mistake. This negative real estate trend will create more headwinds in 2015 for both China and the rest of the world.
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