Juggling Dynamite

Governments worldwide are looking for ways to “ease the real estate crisis” now sweeping much of the developed world. The most popular ideas seek to prop up prices while enabling new buyers to obtain even more credit.

After decades of epic malinvestment in real estate, China is at the forefront of the spreading property crisis. Over the past four years, the government has directed a series of add-more-debt-and-stir efforts. However, with rising unemployment and unaffordability at multi-decade lows, buying ability and appetite are not reviving. In the first four months of 2024, China’s home sales fell about 47%, and unsold inventory hovered at an eight-year high.

At the April 30 Politburo meeting, China’s 24 most senior leaders said they were looking at ways to “digest” the existing stockpile of homes. This week, news of a new approach emerged: Local state-owned enterprises may be asked to help purchase unsold homes from distressed developers at steep discounts using loans provided by state banks, with many of the properties to be converted into affordable housing.

The trouble is that local governments’ debt levels are already high, and bank balance sheets are being eroded by rising bad loans and narrowing profit margins (below since 2013). Writing down asset values and bad debts seems an inevitable outcome. See: China Considers Government Buying of Unsold Homes to Save Property Market.

Bloomberg has learned that China is considering a proposal to have local governments across the country buy millions of unsold homes. This would be one of its most ambitious attempts yet to salvage the beleaguered property market. China Editor James Mayger and Chief North Asia Correspondent Stephen Engle analyze the plan on “Bloomberg: The China Show.” Here is a direct video link.

More malinvestment in propping up asset prices and the status quo is the opposite of what’s needed. The focus has to be on investments and incentives that increase longer-term efficiency and net income (with full cost accounting for the waste and harm created by different business models and revenue streams).

Andrew Grantham, senior economist at CIBC Capital Markets, talks with Financial Post’s Larysa Harapyn about how the headline jobs numbers are not telling the full story. Here is a direct video link.

Also see A Warning from the Breakdown Nations:

Take Canada first. Widely admired for how it weathered the global financial crisis of 2008, it missed the boat when the world moved on, driven by big tech instead of commodities. Canada’s per capita GDP has been shrinking 0.4 per cent a year since 2020 — the worst rate for any developed economy in the top 50. New investment and job growth is being driven mainly by the government.

Private-sector action is confined largely to the property market, which does little for productivity and prosperity. Many young people can’t afford to buy in one of the world’s most expensive housing markets. Pressed to name a digital success, Canadians cite Shopify — but the online store is the only tech name among the country’s 10 largest companies, and its shares are trading at half their 2021 peak.

…The takeaway here is not that smart countries somehow turned stupid. It is that hidden traps line the path of development and can spring on nations at every income level from the middle to the rich. One basic mistake or miss, and any country can find itself stuck — until it finds the leadership and vision to chart a way out. For current stars, the message is a warning: don’t take growth for granted.

The CBC News Network Weekend Business panel takes a look at the top stories of the week. Here is a direct video link.