- Goldman Sachs said the 2008 US housing bust suggests China is only halfway through its current economic downturn.
- The bank said prices, housing starts and new home sales could decline further in China.
- Although the 2008 crisis is different from the China crisis, policymakers should similarly strive to prevent contagion.
The 2008 U.S. housing market crash was one of the worst in economic history, and its lessons remain relevant as China grapples with its own real estate crisis.
The Chinese government faces a narrow policy path to economic recovery this year, with the International Monetary Fund warning the country is in the midst of a historic real estate downturn rivaling the deepest collapse in 30 years. did.
Analysts at Goldman Sachs warned in a Feb. 12 note that once the housing market deteriorates, it can take a long time to bottom out, as evidenced by the U.S. subprime mortgage debacle. This is a lesson learned.
“We estimate that real home prices in China have fallen 16% from their peak in Q3 2021 to Q3 2023,” Goldman analysts said. “If the US experience is any guide, we are only halfway through the price adjustment in the current housing recession.”
U.S. home prices peaked in 2006 at about 40% above fair value, according to Goldman. But its “affordability,” determined by population, income, vacancies, and other indicators, remains far below the levels China faces today.
I can’t see the bottom
According to Goldman Sachs, there is currently no end in sight to China’s housing recession, which began in mid-2021.
The country’s housing starts and new home sales have fallen by 64% and 52%, respectively, since their peak at the end of 2020, and analysts say the country’s inventory glut will keep both variables subdued for several years. Expect.
For context, U.S. real estate home prices peaked in early 2006 and bottomed out in 2012. The U.S. homeowner vacancy rate then peaked in 2008 and did not return to its long-term average until a decade later.
In 2016, the Chinese government took measures such as tightening mortgage requirements in response to soaring housing prices, which had short-term effects. But the pandemic upended those efforts. Price increases accelerated, creating problems for major developers such as Country Garden and Evergrande.
Goldman’s measure of real home prices in China has fallen by only half as much as the US saw during six years of financial collapse, as the chart below shows.
”[O]”The very lax mortgage standards and excessive mortgage debt that were at the heart of the U.S. subprime crisis do not apply to China,” Goldman analysts said, adding, “Instead, the “Excessively high housing prices are a problem.” , which is the cause of many economic distortions. In other words, the US real estate problem has turned into a financial problem, but China’s real estate problem is fundamentally a financial problem that needs to be addressed. ”
ripple effect
Goldman analysts argued that the Chinese government needs to prioritize limiting the impact of contagion from other sectors of the economy.
The US subprime crisis rippled through the financial sector through products known as debt collateral, amplifying the impact of widespread mortgage defaults. Foreclosures skyrocketed as homeowners could no longer afford to pay off or refinance their mortgages, causing home prices to fall further.
Goldman said that to prevent a similar spiral, China needs to take strong policy measures to support local governments and banks and ensure delivery of sold homes.
“Without such decisive action, the negative spillover effects of the housing downturn are likely to prolong the damage to the economy,” analysts said.