Even Beijing Home Prices Are Falling
It’s evidence that capital flight is accelerating as the economy worsens
According to the Financial Times, Beijing home prices have fallen between 10 to 30 percent since peaking in 2021. This is pretty interesting because real estate has long been the only real investment game in town for Chinese citizens and Beijing property was always the crown jewel of the Chinese real estate market. For example, during COVID, in order to protect the sanctity of Beijing, visitors were required to quarantine twice — 2 weeks outside of Beijing and then another 2 weeks at a hotel in Beijing for a whopping 4 weeks of quarantine. So Beijing has always been a bubble within a bubble.
The fact that the bubble seems to be popping now should be extremely alarming to Chinese officials. Unsurprisingly, if you look at official sources, they claim that Beijing real estate is actually up 5% over the past two years. But Chinese economic stats have always been heavily doctored. For example, after being unable to hide the extent of youth employment (as all the unemployed youths made it too obvious), the Chinese government just stopped publishing the data (i.e. pretended the problem didn’t exist). Folks operating on the ground (e.g. those actually trying to sell homes in Beijing) tell a different story though — even with major price concessions, there’s just not enough buying demand.
Real estate continuing to crash and the decline even spreading to tier 1 cities is a major problem. The bulk of domestic Chinese wealth is stored in real estate as relative to the U.S., the Chinese stock and bond markets are underdeveloped (and chock full of state run companies with highly questionable governance). Given the tendency of Chinese firms, especially those with heavy connections to the state, to fudge their numbers, normal citizens have always preferred real estate and regarded it as being more real and safe. This combined with slowing household formation created a situation where the actual fundamental demand for housing was far lower than the produced supply. People saw houses as places to park their cash and not as places to live, often buying up entire floors of condos and leaving them completely empty.
Levering up to buy an asset whose price keeps rising makes you look like a genius. But when prices fall, that same leverage can quickly wipe you out, leaving an investor desperate for liquidity. At that point, you’ve got no choice but to panic sell — adding even more supply into an already oversupplied market.
That’s what happened in lower tier cities when leverage restrictions implemented by the government pricked China’s housing bubble a few years ago. But back then, no one thought it would get this bad. Then a second wave of COVID (and a stubborn and incorrect read of the situation) caused China to mistakenly double down on lockdowns, further hamstringing an already weak economy. On top of that, general concerns over China’s foreign policy and overall leadership caused foreign investors and businesses to flee. Inevitably, slowdown turned into a full blown recession.
Now despite capital controls, there’s real capital flight. Folks with high quality assets are selling and using back channels (that charge a large haircut) to get that money out of the country. That even the most prized and safest of real estate assets is seeing large price declines is evidence that this capital flight is accelerating.
The counter by the government would have to be significant financial stimulus (as capital controls have not been effective at keeping money from escaping). The only fix at this point is to stop and reverse the asset declines. But the system is already extremely levered. Banks owe too much, local governments owe too much, the property developers that have yet to default also owe too much. If the government had stepped in sooner, the cost to fix might have been stomach-able, but now the tab might be too high. Remember, the Chinese government has been trying hard to lower overall debt levels over the past few years, not raise them. The amount of stimulus required to right the economic ship now would probably require a 20–25% increase in debt to GDP. For a regime that’s constantly vilified and frowned upon the West for its debt-fueled capitalist ways, this would be an extremely tough pill to swallow. China’s leaders now face a tough conundrum — copy the enemy or let the economy go up in flames.