On Monday, China's National Bureau of Statistics released home price data for the last month, showing that new home prices in China's urban areas fell by 0.7% between April and May, while second-hand homes fell by 1%.

What makes this data especially worrying for the CCP, though, is not just that it was the steepest decline in new house prices since October 2014, and the steepest decline in second-hand homes since at least 2011, but also that it comes only weeks after Beijing announced its most generous housing support package yet. So in this video, we're going to take yet another look at China's ongoing housing slump, why things are getting worse and look unlikely to improve any time soon, and why this will probably exacerbate China's escalating trade frictions with the rest of the world.

Before we get into it, we recently announced that we're launching a physical magazine which will feature major articles on things like the rising tensions between the US and China, and the US 2024 election.

So if you want to support our journalism, consider learning more or buying a copy by clicking the link in the description. So let's start with a quick recap.

We've done a whole load of videos on China's housing crisis in the past, so you can go and watch those if you want to know more, but the TLDR is that China has some of the most expensive housing in the entire world.

Now, incomplete data and the complicated way that housing interacts with the hukou system make international comparison a bit difficult, but analysis by Kaixin in 2021 estimated that property prices in China's biggest cities like Shenzhen, Beijing, and Shanghai were more than 20 times the median income, making them by far and away the most expensive in the world, and roughly twice as unaffordable as popular western cities like London or New York.

Property now accounts for an estimated 20-30% of all economic activity, and 75% of all Chinese household wealth.

For context, in the UK, which is also suffering through some sort of housing crisis, property accounts for about 36% of all household wealth, about half as much as in China. Now, these ridiculously high prices are mostly a consequence of China's rapid urbanization in the 80s and 90s, which generated unprecedented demand for urban real estate.

To take advantage of this boom, Chinese property developers took out enormous loans, but as the rate of both population growth and urbanization has slowed, these developers began struggling with their debt burdens.

Conscious of the dangerous levels of debt being built up, in 2020, the CCP tried to actively deleverage the Chinese property sector by placing limits on how much they could borrow.

These measures forced some developers to default, most notably Evergrande, and sparked a wider deflation in China's property sector by dampening some of the speculative demand for Chinese real estate.

Anyway, as a result, prices have been falling ever since.

The CCP probably anticipated a drop in prices as at least a foreseen, if unintended, consequence of their deleveraging efforts.

But in the last 12 months or so, as prices have continued to fall, Beijing has come under pressure to do something about it, and prevent a full-on collapse in the Chinese property sector. Originally, the CCP resisted doing anything too drastic to stem the decline, in part because they didn't want to just re-inflate the bubble.

But last month, Beijing announced new measures to try and boost demand in the hundreds of billions of yuan for local governments to buy up spare inventory.

Unfortunately for the CCP, these measures haven't worked at all.

As we mentioned in the intro, in May, house prices fell at their fastest rate in at least a decade, meaning that new homes have now fallen by 4.3% in the last year, while second-hand homes have fallen by 7.5%. So, why didn't these measures work?

Well, as we see it, the most likely reason is that Chinese already have too much debt, so they're not going to take out mortgages when prices are falling, even if Beijing makes these mortgages a bit cheaper or more accessible.

On top of that, some of the demand for Chinese real estate was previously driven by speculation.

In other words, people were buying property not as housing, but as investments, because property prices in urban areas have been steadily rising ever since the 80s.

Given that prices have fallen consistently for nearly three years, housing no longer looks like a safe investment, and these speculative buyers won't be tempted to re-enter the market by cheap mortgages. Anyway, by this point you might be thinking, what's wrong with all of this?

Surely falling property prices are a good thing, given that housing in China was clearly both too expensive for ordinary Chinese people, and driven in part by speculative demand.

And, well, you've got half a point.

While this might be good for China's domestic economy eventually, and perhaps the CCP deserve credit for actively trying to deflate their housing bubble, the problem is that Chinese households are already over-leveraged.

In other words, many Chinese households have taken out significant amounts of debt via mortgages, which means that when property prices fall, they go into what's called negative equity.

In other words, their property is worth less than the remaining value of their mortgage.

This both significantly increases the risk of bankruptcy, but also massively suppresses demand, because households focus on paying down their mortgages rather than spending elsewhere.

This is what many economists think happened to Japan after its property crash in the 90s, which forced Japanese households to focus on paying down their mortgages, which is one of the reasons that Japanese domestic demand is so weak, and Japan is constantly flirting with deflation. This is also likely to exacerbate China's trade frictions with the rest of the world.

As we've argued in previous videos, the root cause of China's trade frictions is not just that it produces and exports lots of stuff, that's what you'd expect from a large economy in a globalized market, but rather because it exports a lot more than it imports.

China's ongoing housing woes are unlikely to have an impact on its industrial production, but they will undermine household confidence and therefore reduce domestic demand for Chinese goods, which will then have to be exported instead.

This would mean an even larger trade surplus, exacerbating the escalating trade war and inviting more complaints about Chinese overcapacity from disgruntled politicians. Finally, this also presents the CCP with an uncomfortable dilemma.

While they've succeeded in deleveraging the property developers and partly deflating the property bubble, house prices are clearly falling faster than they wanted.

Broadly speaking, this leaves them with two options.

They can either provide more support, but risk introducing a moral hazard and ultimately reflating the bubble, or they can take a more laissez-faire approach, as they've done previously, and let prices continue to fall, but risk a Japan-style deflationary crisis. A week or so ago, we announced that we're working on a physical magazine which dives deep into the upcoming UK general election.

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