Where is the limit and future of real estate?

The four major trading markets, namely, stocks, bonds, foreign exchange and real estate, have long been named as "the four lifelines of national finance", which are an important part of the national economy and an important source of residents’ wealth income.

But there was a saying in the market:Ten crises, nine real estate!

This is because there have been too many "crisis killings" caused by real estate in the past few decades.

Specifically:

In 1991, the Japanese government took the initiative to burst the real estate bubble by raising interest rates sharply and banning loans from the real estate industry, which led to a sharp drop in Japanese house prices, and then quickly triggered a crash in the Japanese stock market, leading to the emergence of Japan’s "disappearing 30 years." It can be seen that up to now, Japan’s housing prices and stock indexes have not returned to the high level of that year;

After 2000, influenced by the Internet bubble in the United States, the Federal Reserve adopted a large-scale fiscal expansion policy, which led to excessive market liquidity and excess liquidity flowing into the real estate market, which caused the US house price to rise by more than 80% in four years, resulting in a serious bubble in the US real estate market at that time.

From 2004 to 2006, the United States took the initiative to raise interest rates to control inflation, which punctured the real estate bubble. Subsequently, American residents defaulted on loans frequently, which led to a large number of bad loans in banks, which in turn triggered the "subprime mortgage crisis" and caused a more serious impact on the global economy.

Therefore, the core reason of "subprime mortgage crisis" is also the transmission influence of the collapse of American real estate prices on the financial system.

In addition to the above two classic cases, similar to the Great Depression in 1929 and the Asian financial turmoil in 1997, the real estate crisis broke out and then triggered the financial and economic crisis.

If the laws of these crises in history are analyzed in detail, we can find that there are amazing commonalities and similar conduction chains between them:

Economic recession-government’s stimulus policy-central bank’s interest rate cut-abundant liquidity-real estate bubble inflation-high inflationary pressure-government’s austerity policy-central bank’s interest rate increase-tight liquidity-real estate bubble collapse-crisis broke out and the economy declined.

It can be seen that behind the so-called "ten crises and nine real estates", it reflects the "bad consequences" caused by the government’s excessive intervention in the market and market regulation.

There are no assets in the market that only rise but not fall, but for the government, its tolerance for economic downturn is extremely low. Out of political needs (GDP growth), most officials will take excessive stimulus measures to stimulate the economy in order to get it."False prosperity".

Why does the real estate crisis easily turn into an economic crisis?

Then, how did the real estate crisis evolve into a financial crisis or even an economic crisis?

Let’s take the economic data of the United States as an example to see how much impact real estate has on the macro-economy.

First of all, from the perspective of residents’ assets: in the past 30 years, the average level of American real estate in the total assets of residents was 27.4%.In other words, real estate accounts for more than a quarter of the total assets of American residents, which is already a very high proportion.

If we switch the perspective to the proportion of non-financial assets, this proportion will rise further. In the past 30 years, the average proportion of real estate in non-financial assets of American residents was 81.4%.In other words, real estate accounts for more than 80% of the total assets of American residents, which directly affects the total wealth of residents.

Once the wealth of residents shrinks seriously, it will inevitably affect their willingness to consume, which will lead to economic recession.

Secondly, from the perspective of residents’ liabilities, this situation will become more and more serious. In the past 30 years, long-term mortgage loans accounted for 71.8% of American residents’ liabilities. In other words, more than 70% of residents’ liabilities are concentrated in the real estate side. Once the economic recession, residents’ income decline, residents’ solvency is limited, and the value of superimposed real estate falls sharply, then there will be a large-scale loan default phenomenon, which will then evolve from a real estate crisis to a financial crisis or even an economic crisis.

It is precisely because the real estate industry is so extensive that the national government will not allow large-scale collapse of the real estate industry (except Japan), and most of them will save the real estate crisis through a series of means. It can be seen that before the subprime mortgage crisis in the United States (2006), the proportion of American real estate industry in its GDP continued to decline. After the crisis broke out, the proportion of American real estate in its GDP rose rapidly from 11.1% to 12.2%; On the contrary, the financial industry in the United States has been significantly impacted, and its proportion in GDP has dropped from 7.6% to 6.8%.

That is to say, although there were "ten crises and nine real estates", by the time the crisis really broke out, the real estate industry had already "gone to waste its clothes and hidden its merits and reputation", leaving the banking and financial industry alone in a "messy situation". Under the leverage effect, there will be systematic risks in the banking and financial industry, which will lead to a greater crisis.

Think carefully and be extremely afraid-Why is real estate "sought after" by capital?

The return on investment of real estate, why the house price has been rising, and the bursting of overseas financial bubbles is also caused by real estate.

We know that the real estate industry is a capital-intensive industry, and every "big water release" will be accompanied by the rapid rise of housing prices, so why is real estate so sought after by capital?

There are four main reasons:

First of all, real estate (especially high-quality real estate) is just the need of residents’ life.There are at least two rigid housing needs in a person’s life, one is the demand for housing generated by marriage between 20 and 30; The other time is the demand for replacement houses before the age of 40-50 (in exchange for better and better property). With the birth of a large number of people every year, the market demand for real estate is continuous.

Secondly, the risk of real estate withdrawal is relatively low.As the ballast stone of the national economy, the real estate industry cannot fluctuate greatly in principle. Once the house price falls beyond expectations, it will have a serious impact on the economy, and it will also usher in public administrative intervention and regulation, which also leads to a relatively small pressure on the retreat of house prices relative to other asset prices.

Thirdly, the return on investment in real estate is relatively high.The return on investment in the real estate industry is mainly divided into two parts. One part is the return on investment brought about by the rise in housing prices (except in some countries), and the overall housing prices are rising year by year; The other is that real estate can be rented to obtain a relatively stable cash flow return. Therefore, on the whole, the comprehensive rate of return on investment in real estate is relatively high among all assets.

Finally, the holding cost of real estate is relatively low.Except for some countries that levy high property taxes, the global real estate holding cost is relatively low, which is relatively favorable among many passive income assets (such as fund custody fees and stamp duty).

Therefore, on the whole, real estate not only has continuous rigid demand, but also has three asset characteristics of low risk, high return and low holding cost, so it is not surprising that it is sought after by capital.

Therefore, in the context of loose money, capital will be relatively more favored in the real estate industry, which will greatly raise housing prices.

This is also the root of the real estate bubble!

Four fission stages of four types of housing enterprises in China

From the microscopic point of view, while the real estate bubble is forming, the excessive leverage of housing enterprises is also an important factor inducing the real estate crisis.

Chi Guangsheng, chief real estate & fixed income analyst of Essence Securities, wrote the book "Through Prosperity-The Limit and Future of Real Estate", which described in detail the four periods of the development of real estate enterprises in China and four types of radical real estate enterprises under the development of the real estate industry. This can help us "see the micro-knowledge"-reveal the "all beings" in the macro environment.

According to teacher Chi Guangsheng’s classification, China’s real estate enterprises are divided into four periods:

The first stage: before 2003-the initial stage.At this time, the domestic real estate market was in its infancy, and the policy also encouraged the development of real estate. Many housing enterprises that we are familiar with now were established in that year. At that time, the debt scale of housing enterprises increased rapidly, but the overall leverage level was not high, and most of the liabilities were below 50%.

The second stage: 2004-2013-development period.Encouraged by the policy, housing enterprises ushered in the period of expansion, and the expansion of state-owned enterprises was obviously greater than that of state-owned enterprises. Large-scale housing enterprises began to make a nationwide layout, cooperative land acquisition gradually rose, market concentration rose rapidly, and the leading tendency of housing enterprises appeared. At this time, although the leverage ratio of housing enterprises is still rising significantly, the overall level is controllable.

The third stage: 2014-2019-expansion period.Mr. Chi Guangsheng believes that expanding scale, competing for ranking, fast turnover, high leverage, cooperative land acquisition, sinking soil reserves and lax financing discipline are the mainstream development models of housing enterprises in 2014-2019.

At this stage, we can see that the amount of additional financing for housing enterprises has risen rapidly to the historical peak (the amount of additional financing reached 176.84 billion yuan in 2015).

After 2017, the issuance of US dollar bonds by housing enterprises began to increase substantially, ABS financing also began to rise, and the financial situation of housing enterprises began to deteriorate rapidly.

The fourth stage: after 2020-adjustment period.Under the restriction of the policy of "three red lines" and "two centralized loans", the development speed of housing enterprises began to slow down obviously, private enterprises were hit by liquidity and began to enter the "winter" mode, and state-owned enterprises also began to slow down their expansion and focus on steady operation.

In this macro environment, four types of radical housing enterprises have emerged, which constitutes the "chaos" of the real estate industry now-

The first category, contrarian expansion housing enterprises:Under the background of the slowdown in the growth rate of commercial housing sales in 2016 and the shift in the financing policy of housing enterprises in 2018, this type of housing enterprises still expand their land acquisition against the trend and increase their land reserves, resulting in their high leverage ratio and are currently in a liquidity dilemma.

The second category, impatient and aggressive housing enterprises:This type of real estate enterprises also increased their leverage expansion when the macro environment changed, but they mainly expanded to low-energy cities in the third and fourth tier, trying to seize the national market. However, after the tightening of the financing environment, they also suffered a serious impact and their financial situation deteriorated rapidly.

The third category, debt imbalance housing enterprises:This type of company relies heavily on overseas debt. Under the background of deteriorating financing environment, its debt fragility is significantly higher than that of other companies with diversified debt structures, and the short-term debt repayment pressure is enormous.

The fourth category, over-capitalized housing enterprises:This type of company prefers to introduce high-cost war investment and high-interest loan financing to expand its land reserve on a large scale. It is the enterprise with the strongest risk preference among the four types of enterprises. It practices the "rolling profit model" by financing the whole society through diversified projects, which is also the main reason for its current liquidity trap.

On the whole, it is an inevitable trend of the periodic development of China’s real estate enterprises that the real estate industry is "all living things" at present, and the overly radical expansion strategy is an important reason for the "chaos" in the real estate industry to some extent.

Cycle after cycle-where is the way out of the real estate cycle?

With the development of the real estate market, sinceSince 2008, China has experienced four real estate cycles:

The first round: Q3 2008-Q1 2010 (upward), Q2 2010-Q1 2012 (downward);
The second round: Q1 2012-Q1 2013 (upward) and Q1 2013-Q3 2014 (downward);
The third round: Q3 2014-Q3 2016 (upward), Q3 2016-Q3-2020 (downward);

The fourth round: Q1 in 2020-Q3 in 2020 (upward), Q3 in 2020 till now.

From the perspective of international experience, the duration of the real estate cycle (also known as the Kuznets cycle) is 15-20 years, of which the market of the American real estate cycle is about 16 years, of which the expansion phase is about 11 years and the contraction phase is about 5 years.

It is a medium-long cycle that is longer than Kichin cycle, but shorter than Kangbo cycle. Its main measure is based on population process and building construction intensity, which was put forward by economist simon smith kuznets.

Although the real estate cycle has different forms and lengths in different countries, it is certain that there is indeed a "cycle" in real estate.

With the deep adjustment of China’s real estate industry at present, the market’s expectation for real estate has dropped to freezing point, so where is the way out for future real estate?

This is the core topic of this master course!

On this Saturday, August 12th, 2023, Wall Street invited Chi Guangsheng, chief real estate & fixed income analyst of Essence Securities.Master course on real estate theme will be launched, from macro to micro, from finance to practice, from policy to market. Mr. Chi Guangsheng will spend 4-5 hours in one class to explain the real estate market in China.

Chi Guangsheng is the chief analyst of Anxin Securities’ real estate & fixed income. He has 6 years of experience in real estate project development and operation in real estate enterprises. He has not only managed projects, but also done research, and has published many reports and papers independently in Financial Research, International Financial Research and China Money Market. It can be said that his working experience has always been a close observer in the real estate industry chain, and he will share his years of research, observation, thinking and understanding of real estate with everyone in the course.

The course is divided into four modules, the macro chapter focuses on housing sales, the policy chapter focuses on real estate policy, the micro chapter focuses on housing enterprise behavior, and the asset chapter focuses on asset pricing.When studying Taoism, we should keep abreast of the changes of the times.

Has the commercial housing market in China reached its limit? Will China real estate repeat the Japanese mistakes? What is more important than "housing and not speculating"? How to fully understand China’s real estate policy? What inspiration did the defaulting housing enterprises give us? What step has the liquidity dilemma of housing enterprises developed to? What impact will real estate changes have on the pricing of large-scale assets? ….. These questions and implications will be discussed in depth in the course.

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