Today we look more closely at this astounding comparative look at U.S. and China home equity and debt levels:
Current United States Total Home Values – $15 trillion
The mortgage debt on those homes? 80%, give or take a few percentage points
Current China “Lower & Middle Class Only” Home Values – $15 trillion
Mortgage debt on those homes? Zero
It is easy to suggest this astounding economic insight better enables us to grasp the underlying forces impacting the economic power shift we are seeing from West to East. As a quick side note on the subject of debt, let’s also take a moment to remember the positive effect the judicious use of debt has had over the past 50 years. How’s that you ask? In truth, most of the past 20 years global expansion would not have occurred without the U.S. debt financed spending binge so let’s not pretend otherwise. Countries love to complain about America’s debt but they have also enjoyed going along for the ride.
Based on GDP, the economic power of Japan and China lag far behind the U.S. at only $4 trillion each, followed by Germany in the $3 trillion range. Maybe if countries such as Germany which leads the Euro block had been willing to accept higher debt levels as a growth driver, then German GDP would also be proportionately higher? China has also done more than its fair share of racking up serious debt loads via broad-based economic stimulus lending during these past few years. However an enormous differences lies in that Chinese lower and middle class households stand admirably alone as 30% plus cash-rich savers and are also bursting with a far less talked about piece of the world’s economic puzzle; trillions in mortgage-free, fresh home equity.
The Miracle of China’s $15 trillion in Home Equity Power
Let’s argue for a moment that the U.S. mortgage – China equity numbers we started with could be too general or generous to be meaningful. However, digging deeper to the history of property appreciation in the U.S. and China, that argument falls flat fairly quickly and for an amazing reason. A key economic growth curve which required 40 years in the U.S. economy has run its course over a much shorter 10 year period in China. What looks like an economic miracle is really no more than the top of mind, exciting, yet vexing subject in today’s world known as the accelerating rate of change. Accelerating rates of change are a characteristic of this generation broadly impacting our lives.
U.S. Middle Class Home Equity and Mortgage Levels
U.S. middle class suburban home prices starting back in the 1960’s were in the range $30 to $60,000. Those millions of homes today fall in a price range property value of $90,000 to $250,000. A time span of over 40 years was required to achieve that range of 3 to 8 times appreciation in price; a long slow appreciation curve. Can we confirm that the average home equity is perhaps in the 20% range currently? Yes we can. 30% of homeowners in the U.S. have no mortgages. The remaining homes with mortgages barely have a dime of equity with most reports indicating that 30% of U.S. home owners are upside down in their mortgages.
China’s Middle Class Home Equity
Now let’s take a look at China’s home property price appreciation curve.
Property value appreciation that took 40 years in the United States has occurred in China in only 10 years.
That unprecedentedly steep curve in China’s economic expansion explains a large proportion of the rising shift in economic power toward China. $15 trillion of home equity with no mortgage debt lends even more light on our global new reality. Imagine how much better shape the United States would be like if 50% or more of households were free of their mortgage payment.
Comparing Home Values in China
Looking back only 10 years to 2001, China’s 1st tier cities such as Shanghai, Beijing, Guangzhou and Shenzhen had similar local apartment prices as in the 1960’s U.S., falling in the range of $30 to $60,000. Home values in the mainstream 2nd tier cities such as Dalian, Shenyang, Tianjin, Chengdu, were lower by half again, more like $15 to $30,000. A couple of quick calculations tells us those prices translate into the $30 to $75 per square foot range.
Those millions of typical, middle class apartments all across China are mortgage-free. Did you know that home mortgages, let alone credit cards, hardly even existed in China in 2000? They probably didn’t even have Chinese characters back then for the phrase “credit cards”.
Only 10 years later, property in the 1st tier “property bubble” cities have increased in value an average seven-fold from the $30-60,000 to $200-$400,000. While in 2nd tier cities, property prices have increased a much more reasonable four-fold from $15-30,000 to the $60-$120,000 range across a much wider swath of Chinese daily society. Considering normal long term global economic cycles, inflation, and property values, the $60-$120,000 price range is likely to act as a minimum long term price range floor for those millions of households.
Let me give you a perfect lower/middle class household example to illustrate; In the 2nd tier city of Shenyang in northern China, my friend’s mother-in-law is a retired schoolteacher living in her five story walk-up 80 sq meter apartment, located in a garden apartment complex of 600 similar apartments in which we find all of the area’s retired schoolteachers. During their career well over 20 years ago, they were allowed to purchase their apartment for 800rmb psqm which is about USD $10 per square foot. Today the apartments are worth five times higher, 4500rmb psqm, USD $50 per square foot, which equals close to USD $65,000, arguably still a relatively modest valuation.
As is common throughout the cities of China today, the new apartment developments in the surrounding area are certainly much nicer and more desirable than the older, more rundown neighborhoods and they are valued in the $100,000 – $150,000 range. still well within a reasonable range for urban home prices in a growing economy. Here are several reasons why:
1. The city in general continues to be rebuilt and revitalized.
2. A new subway line is going in with a station just 10 minutes walk away.
3. Along Shenyang’s main corridor, Sheraton, Marriott, Doubletree and Shangrila hotels are being built along with Hong Kong New World Towers and Kerry centre commercial multi-use office/retail towers, also alongside the new Expo convention centre areas.
3. Several multinational companies have set up shop in or outside the city.
4. South of the river, the new residential and commercial area includes the Olympic Soccer Stadium, another new WalMart Supercenter and the new city government and commercial zone.
5. Related to environmental issues, most of the polluting factories have been moved outside the city to make the city more liveable.
Needless to say, our sample community of 600 retired school teacher home-owners all have 100% equity in their homes. Some of that equity will eventually makes its way into the economy. We shouldn’t expect elderly, retired homeowners on small pensions to run out and apply for home equity loans but in fact within 10 years, many of these elderly home owners will pass away, leaving the home to their children who will most likely sell it and use the money in some other way, adding money to the economy.
Classic Inflationary Progress and Economic Growth
Back in America, a 1600 sq ft Scottsdale, Arizona home with a two car garage and swimming pool which was sold in 1995 for $110,000 is valued at $180,000 today, even after a 30-40% drop from its peak value before the financial crisis of 2008. With America’s economy still struggling, many expect that property values will still fall further. Understand that China on the other hand is on the classic inflationary rise including all the historical hallmarks one finds such as rising prices across all sectors along with rising wages, not yet supported by the untapped economic foundation of this unprecedented mortgage free equity pool.
So we ask does a fresh pool of 70 million mortgage-free middle class homes scattered across dozens of China’s 2nd tier cities valued today at $60,000-$120,000 plus an additional 30 million homes valued at $200-$400,000 range pack an economic punch strong enough to at least keep China on the growth track and even blunt the world’s economic woes?
To answer that question, there are a couple of related variables to consider; Chinese are still loath to borrow on their home equity. While rates of credit card usage have accelerated rapidly in Chinese society they are still in their infancy, far behind credit card usage rates in the United States. Entrepreneurial business owners are the ones in today’s Chinese economic landscape who are most likely to borrow on their home equity for the purpose of investing in a business. They may borrow up to 70% of their home equity from a bank to build their business. Once again, this is still not a widespread practice. If the middle class home equity loan rate over the next 10 years reaches 30% of equity, that could conceivably add an estimated $3-5 trillion of spending to the Chinese economy during that period, a welcome addition as far as the Chinese government in their mission to stimulate domestic consumption.
Related to the question of such trends in lending and borrowing, Chinese are still the world’s greatest savers with a 30% plus savings rate. As Chinese consumers start borrowing more on their massive home equity pool to consume and make entrepreneurial investments, they will have additional monthly loan payments and the national savings rate could perhaps come down to 20%. Even a 20% savings rate would be regarded as amongst the highest savings rate in the world compared to other countries.
Finally, consider that this treatment of China’s lower and middle class home equity as one of the economic factors is separate from China’s much more talked about and controversial luxury home market where prices currently hover in the 20 to 80,000rmb per square meter range. A close look at the luxury sector of China’s real estate market reveals far higher mortgage levels related to higher risk speculative activity and invites further understanding.
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