China expert and Economics professor Patrick Chovanec said the following about China to CNN in April: “No one has hit the panic button yet. Everyone is holding out hope that at some point it turns around somehow. But I also think that’s a triumph of hope over reason.” Just ask Morgan Stanley how they are hoping for things to turn around…

In his latest piece at Economonitor, here is what he concluded:

1. The [chinese real estate] market is not poised to recover, but will continue to see greater downward pressure on prices;

2. Real estate investment is likely to flatten out or start falling, erasing several percentage points of GDP growth.

His conclusions are based on the market facts below (via Mish):

  • Year-on-year sales in Q1, for all real estate, was down 14.6%.
  • Residential property sales were down 17.5%
  • Office sales were down -10.2%
  • Sales in January-February were a disaster, falling 20.9% overall, compared to the first two months of 2011, -24.7% for residential.
  • Total amount of floor space “for sale” was up 35.5%, compared to the same date last year
  • Floor space of residential units “for sale” grew 47.4%.
  • At the end of 2011, total floor space “under construction” was roughly 4.6 times the floor space sold
  • A year and a half worth of excess inventory is hidden somewhere in the pipeline
  • New starts in April fell 14.6% year-on-year and 27.0% month-on-month, for property as a whole
  • Housing starts fell -14.4% year-on-year and -23.4% month-on-month
  • Office starts fell -21.0% year-on-year in April, and -45.1% compared to March
  • Retail property starts fell -18.7% year-on-year, and -36.8% compared to March
  • Land sale revenues in April (RMB 27 billion) were down -54.7% compared to April last year
  • Foreign funding for property development was down -91.4% in March and -80.8% in April, compared to the same months last year

Chovanec continues:

“The second implication of the dynamic I’ve just described is that the “resilient” growth in real estate investment that seemed to promise a “soft landing” is not very resilient at all.  It’s more like the last gasp of a market that’s running out of steam.  Once the surge in completions plays out, the declining number of new starts will become the pipeline, and growth in property investment will flatten or go negative.  Property investment accounts for roughly a quarter of gross Fixed Asset Investment (FAI), and net FAI accounts for over half of China’s GDP growth.  As I noted in January, in a back-of-the-envelope thought exercise, if property investment plateaus (growth falls to zero), it could shave as much as 2.6 percentage points off of real GDP growth.  If it fell 10% (in real, not nominal terms) it could bring GDP growth down to 5.3%. At the time I first saw this dynamic in the data, when the Q1 numbers came out, I figured it would take several months to begin playing out.”

According to Mish, “the real estate crash has arrived… the GDP crash will follow.

But again, Morgan Stanley doesn’t think so.

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