ROSENBERG: There's A 'Black Swan' Stewing In China

David Rosenberg, chief economist & strategist at Gluskin Sheff, has identified a big risk looming out there in the global economy:

The Chinese housing market.

In the past, China’s housing market was a key source of economic growth and jobs. But now that things are slowing down in the world’s second largest economy, it could get ugly.

Here’s what Rosenberg wrote:


One looming “black swan” is the Chinese housing markets, which is providing to be a key source of pressure on the economy (notwithstanding last year’s upward GDP revision which merely reflected a different accounting procedure) and creating financial strains along the way — all 70 mainland cities are now experiencing YoY home price declines of between 1 and 9%.

Friday’s NYT cited reports of major apartment complexes now are only between one-third and one-half unoccupied, and that many projects are halfway through construction and the cranes are now idled.

This is a crucial overhang for a sector that directly accounts for 13% of the economy and indirectly (via the impact on ancillary sectors) that number is closer to 33%.

Even with the builders cutting their housing start production by 34% in November from year-earlier levels, demand has weakened to such an extent (because affordability has become extremely stretched to the point that in the big cities an apartment costs 20 years’ worth of wages for college grads), unsold inventory in the large cities ranges between 12 and 18 months of supply — that is huge and explain why average prices have fallen 7.4% since April alone.

We all now how real estate deflations end … not well.

Anyone who remembers the boom and bust of the US housing market understands how bad things can get. Prices tumble, bad debts surge, and credit markets seize up. And if things really come to a head, you have yourself a global financial crisis.

It’s a bit of a faux pas to call it a “black swan” as “black swan” risks are by definition almost impossible to see coming.

But when they come, it’s bad, and that’s the point Rosenberg seems to be emphasising.

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