Does the epidemic make the bubble more rigid?

  When it comes to real estate, almost everyone who has bought a house can be called an “expert”. After all, a house is the largest asset in the residential asset structure, and it is an asset that can be used to “change destiny.” Who hasn’t done unforgettable research? If I think there is a “bubble” in real estate, it will be criticized by many people because it is suspected of degrading their “asset value.” Recently, the epidemic has continued, but the real estate in first- and second-tier cities such as Shenzhen, Hangzhou, Nanjing, and Chengdu are “hot” unexpectedly. To this end, I will mention some past events and talk about some impressions.
  China’s real estate: rational prosperity or irrational prosperity. The
  2013 Nobel Prize in Economics Chairman Robert J. Shiller is an economist I admire very much. He is one of the founders of behavioral finance. I have been studying China’s capital market since the early 1990s. At first, it was difficult to understand the long-term high valuation of A-shares, so I tried to find answers from the perspectives of behavior and psychology. Later, I finally found Schiller’s stunning work-“Irrational Prosperity”.
  There is also a classic story about the book “Irrational Prosperity”. At the end of 1995, experts convened by Federal Reserve Chairman Greenspan exchanged views on the stock market. Everyone agreed that the stock market was in an overheating stage and investors should be aware of it. Professor Schiller called this special stage “irrational.” Prosperity” (Irrational Exuberance). Two days later, Federal Reserve Chairman Greenspan’s speech at a private dinner party used “irrational prosperity” to describe the stock market at that time.
  Although this was only an informal speech, the stock markets of developed countries responded to the decline in a “tacit” manner. The Nikkei index fell by 3.2%, the German DAX index fell by 4%, the UK FTSE index fell by 4%, and the United States said. Trading in the first half of the Jones Index fell 2.3%. However, the management’s warning was only a short period of time to awaken investors. The US stock market continued to drive global stock markets upward. The real decline in the US stock market took place in mid-2000, five years after Greenspan’s warning, and the Chinese stock market followed the US Internet stock bubble until mid-2001.
  I remember that in March 2007, I thought that “irrational prosperity” had also appeared in A shares, so I published an article “Valuation Imperfections under Assets Inflation” in the “New Fortune” column, trying to learn from the perspective of behavioral finance To explain the irrationality of the A-share stock price trend.
  In 2009, I finally met Professor Schiller at a seminar in Shanghai Jiaotong University Gaojin. At that time, the world was experiencing an economic downturn caused by the US subprime mortgage crisis. He said in his speech, “I am very worried about Shanghai’s property prices.” I ask: Do you think the house bubble in China will burst soon? He replied, I don’t know if it will be shattered, but Shanghai has always been compared with New York and London. Perhaps the benchmark for this comparison is wrong. For example, the housing prices in London and New York are already overvalued, but Shanghai is even more overvalued than them. The housing price to income ratio in California is 8 to 10 times, while the housing price to income ratio in Shenzhen, China is 36 times.
  Eleven years have passed in a blink of an eye, but the housing prices in Shenzhen and Shanghai have risen many times over that time. It seems that, as far as China is concerned, the housing price-to-income ratio is not a good indicator of the capital bubble. For example, although the current housing price-to-income ratio in Shenzhen is still the highest in the country, it has dropped from 36 times in 2009 to 35 times in 2019. However, the national housing price-to-income ratio has risen from 12.5 in 2010 to 13.3 times. (Figure 1)
  In other words, although housing prices are rising, residents’ incomes have also risen almost simultaneously. Moreover, Shenzhen is a nationwide immigrant city. Shenzhen’s housing prices are not closely related to the income of the Shenzhen registered population. What’s more, there is a big gap between the actual disposable income of Chinese residents and the published sample survey data. In this regard, Professor Wang Xiaolu and Professor Gan Li, including myself, have done research for many years, and the conclusions reached are not very different. : The size of the gap is more than 10% of the GDP of the year.
  Moreover, judging from the trend of the housing price-to-income ratio, 2010-2015 is actually “returning to rationality”, and there has been an “irrational” increase in 2015-2017, which is the same as the five RRR cuts and five The interest rate cut this time is related to the phenomenon of “falling out of reality to virtuality” in the economy. Since 2018, due to strict policy controls on housing prices, overall, there is a trend of “returning to rationality” again.
  The valuation method of real estate can be compared with stocks. If buying stocks is buying the future, buying a house is also buying the future. If we regard the housing price/rent ratio as a price-earnings ratio, the price-earnings ratio can be divided into static and dynamic. From a static perspective, the housing price/rent ratio is much higher than that of developed economies, but the “price-earnings ratio” of Chinese houses never seems to be low. Yes, because there has hardly been a bear market.
  Of course, the valuation of the stock market still depends on growth, that is, P/E/G (G = earnings growth rate multiplied by 100). As long as P/E/G is less than 1, it is very advantageous in valuation. For example, P/E is 30 times, if the annual profit growth rate exceeds 30%, then there is a great valuation advantage. But even if the PEG does not reach 1, as long as the earnings growth rate exceeds the stock price growth rate, then PE can still fall to approach a reasonable valuation level.
  From the perspective of the “price-earnings ratio” of houses, China has always been higher than foreign countries. The rental yield of the property market in developed countries is generally 2-3 percentage points higher than the mortgage interest rate, because the rent has to be deducted from taxes and fees, while the current rental yield of the first-tier cities in China is less than 2%. , Shenzhen is 65 times, Beijing 44 times, Chongqing 36 times, far lower than 5% (20 times) above mortgage interest rates.
  At the same time, in the past two years, apart from Beijing and Chongqing, where the housing price-to-rent ratio has been relatively stable, the housing price-to-rent ratios in Shanghai, Shenzhen and Hangzhou have increased significantly, which means that the bubble is still growing. (Figure 2)
  Therefore, as far as the current situation is concerned, the profit model of investing in real estate still relies on spreads, which is similar to China’s early stock market, so the bubble in China’s real estate is still obvious. I humbly believe that using “irrational prosperity” to describe the current property market should be objective. Of course, irrational prosperity does not mean that house prices will definitely fall.
  So, for reflection, 11 years ago, when Schiller thought that the housing price-to-income ratio of Shenzhen and Shanghai was two or three times higher than that of New York, did it also enter the stage of irrational prosperity? I think there should be none. Because he did not consider that China’s urbanization process was so fast, the large influx of people from Beijing, Shanghai, Guangzhou and Shenzhen, the substantial increase in residents’ income, and the increase in rental income. So, according to this logic, looking at today’s Shenzhen and Shanghai housing prices in another 10 years, will they still belong to rational prosperity?
  It depends on the population flow, income growth rate and rent growth rate of my country’s megacities in the next ten years. In terms of population, the national urbanization growth rate will definitely slow down significantly. The population of Shenzhen and Guangzhou should continue to grow. The registered population of Shanghai and Beijing are expected to grow negatively (population aging), depending on whether the population restriction policy will be cancelled. Income growth is related to GDP, and GDP growth will continue to decline in the next ten years; rent depends on the relationship between supply and demand, but the overall increase will also slow down. Therefore, my conclusion that China’s property market is currently in a stage of irrational prosperity remains unchanged.

  Will the “rigid bubble” burst?
  About four years ago, Professor Zhu Ning, a student of Professor Schiller and Deputy Dean of Shanghai Jiaotong University Gao Jin, gave me a book called “Rigid Bubble”. The book is the Chinese version after the English version was published, and the English version of the book is called China’sGuaranteedBubble (China’s Guaranteed Bubble).
  The concept of “rigid bubble” proposed by Zhu Ning has two meanings. The first meaning is that the government continuously provides guarantees to enterprises and investors. For example, bond stocks are explicit guarantees, and debts owed can be repaid through equity through state-owned financial institutions. In the past 30 years, this kind of guarantee has made a great contribution to the rapid development of China’s economy. However, if the government has been providing guarantees to stimulate or attract investors while distorting the relationship between risks and returns in the economic and financial system, the result is likely to lead to a “final bubble.”
  The second meaning is that if the current economic growth model goes further, it may lead to a large-scale financial bubble and collapse in China, because under the current economic growth model, one day the debt growth rate will definitely exceed the corporate profit growth rate. The result must be a bubble. On the premise of a given result, if the delay is longer, the bubble will blow bigger, it is likely to bring the final risk and the next generation of people, the whole Chinese economy will be more crises in the next ten or twenty years. Big.
  In fact, since 2016, my country has vigorously promoted supply-side structural reforms, and the intensity of leverage reduction in finance and other fields has increased significantly. Of the three tough battles, the first is to prevent economic risks. Housing and housing are not speculated as the biggest prerequisite for all countercyclical policies.
  From the perspective of the implementation effect of the supply-side structural reform, it should be quite significant, especially in the financial sector, where the leverage ratio, off-balance sheet business, and P2P of financial institutions have all been well regulated. Imagine that without these measures in the past four years, in the current epidemic, financial risks would rise sharply.
  Nowadays, the biggest bubble facing my country’s economy is the property market. After all, my country’s property market has been a bull market for 20 years. In any country in the world, a bull market that can last for 10 years is bound to have a bubble. The domestic A-share bull market lasts for two years. Large bubbles will appear and burst, such as 2006-2007, 2015-2016. The reason why the property market bubble is so rigid is related to the serious binding of the interests of many departments such as local governments and financial institutions. As Professor Zhu Ning put it through: China’s Guaranteed Bubble.
  Since the epidemic, the area of ​​real estate sales in January and February fell by about 40% year-on-year, but it only fell by 14% in March. Sales volume has clearly begun to strengthen, and the growth rate of real estate investment has also shown positive growth, which can be described as unique. At the same time, the stock market was relatively hot in the first quarter, with a sharp increase in transaction volume and a substantial increase in the scale of fund purchases. Although the Shanghai Composite Index fell 9%, it was one of the lowest on the global stock market decline list. The Shenzhen Growth Enterprise Market also rose about 4%. At the same time, the number of newly opened accounts in March reached 1.9 million, which is close to the number of newly opened accounts in the first quarter of 2019.
  But looking at the real economy, since the epidemic, GDP growth has dropped by 6.8%, which is the lowest level since statistics on this indicator. Wholesale and retail sales have fallen by 17%, accommodation and catering have fallen by 35%, and the construction industry has fallen by 17%. Therefore, we must once again pay attention to the phenomenon of China’s economic “removing from reality to virtual”.
  In 2015, the Central Bank implemented five RRR cuts and five interest rate cuts. A-shares nearly doubled in the first half of the year to more than 5,000 points; then, housing prices began to rise. This is why the central government wanted to force it in 2016. The reasons for pushing supply-side structural reforms and resolute deleveraging. If it is said that the fall from the real to the virtual in 2015 is mainly due to the decline in the return on investment of the real economy, and the capital market is more attractive than the real economy under financial innovation, then the “suspected fall from the real to the virtual” is due to the epidemic Under this situation, not only has the overall rate of return of the real economy dropped sharply, but there is also a lack of investment opportunities.
  Judging from the quarter-on-quarter data released by the National Bureau of Statistics, in March, the month-on-month increase in the sales price of newly built commercial housing in the first, second and third-tier cities increased slightly, and the sales price of second-hand housing rose slightly. Since the beginning of this year, house prices in Hangzhou and Shenzhen have risen sharply, and many luxury houses have been snapped up.
  Statistics from Shenzhen Central Plains show that in March, 3,152 new homes were signed online, an increase of 279.8% from the previous month, and the area of ​​online signing was 323,800 square meters, an increase of 279.9% from the previous month. According to a survey by a Chinese reporter from a brokerage firm, many of the main players in this wave of house purchases come from some business owners. According to industry insiders, the main reason for the recent surge in housing prices in Shenzhen is that after business owners have bought a house in full, they can be used to mortgage low-interest loans. And this set of profit models is related to the “Measures for the Implementation of Loan Discount Projects for Small, Medium and Micro Enterprises” issued by local governments during the epidemic.
  Of course, this is only a case in some cities, and the reason for the rise in housing prices cannot be attributed to “discounted interest arbitrage.” I think there are two other reasons, and both of them are structural. The first is related to the flow and differentiation of my country’s population. In 2019, Hangzhou’s population increased sharply by 554,000 over the previous year, while Shenzhen increased by 412,200 year-on-year, becoming the two largest cities in the country with the largest population inflows. The large-scale influx of population has increased the demand for the property market.
  The second is related to changes in the income structure of residents. Over the years, the income growth of the high-income group has been significantly higher than that of other income groups. For example, according to the statistical bulletin of the National Bureau of Statistics, the per capita income of the high-income group from 2016 to 2019 The cumulative increase in disposable income is 29%, while the cumulative increase in the middle-income group is only 19%. The gap between absolute income and relative income is widening.
  This is only the result of a sample survey, and the actual gap is much larger. For example, I estimated that the hidden part of my country’s residents’ disposable income that was not included in the statistics in 2018 was about 13 trillion yuan, most of which belonged to the high-income class. Figure 3 is the “China Luxury Consumption Report” published by McKinsey over the years based on UnionPay luxury goods transaction data. According to the report data, the Chinese bought 1% of the world’s luxury goods in 2000 and the world in 2018. One-third of luxury goods. (Picture 3)
  This is why I don’t like to use the housing price-to-income ratio as an indicator of property market valuation, because official data greatly underestimates the actual purchasing power of the high-income class. So, will the epidemic narrow or widen the income gap? Judging from past cases at home and abroad, the results of loose monetary policies and proactive fiscal policies during economic downturns usually widen the income gap among residents.
  At the same time, as mentioned earlier, during the epidemic, the prevention and control of economic risks is the first priority. The stability of the property market is the common interest of local governments, developers, financial institutions, and house owners. Therefore, my conclusion is that the epidemic has caused bubbles. More rigid. As for whether the bubble will eventually burst, the answer is: yes, but the duration of irrational prosperity is uncertain.
  Having written this, I think that everyone can understand why the Politburo meeting on April 17 reiterated “adherence to the positioning that the house is used for living, not for speculation.” In terms of countermeasures, in the future, it can be achieved by increasing the supply of residential land, transforming a large number of vacant office buildings into residential buildings, etc., see the “Opinions of the CPC Central Committee and the State Council on Constructing a More Complete Factor Market Allocation System and Mechanism” related information.