On September 18th, the United States cut interest rates. On September 24th, China’s financial sector held a press conference and announced a high-profile reduction in reserve requirement ratio and interest rates. There is a close connection between these two, and it can even be said that there is a relationship between antecedents and consequences. The United States has finally lowered interest rates, marking the beginning of a cycle of interest rate cuts in the United States and representing the overall global trend of interest rate cuts. From our qualitative analysis, it is positive for the real estate market and housing prices; Lao Yang’s next very clear conclusion: monetary easing will inevitably lead to an increase in housing prices! Various basic logics and qualitative analyses suggest that monetary easing is beneficial for the capital intensive real estate industry and market. The looser the currency, the more favorable it is for the rise of the real estate market. This basic logic can be said to be true and universally applicable. Next, let’s take a brief look back.
The experience of the United States and Japan is different in process, but the results are similar. The monetary easing and interest rate cutting cycle in the United States has a significant impact on stimulating housing prices. From 2001 to 2004, there was a cycle of interest rate reduction in the United States, which eventually spawned a foam. After housing prices peaked and fell, the subprime mortgage crisis was triggered. In September 2007, the United States once again experienced a cycle of interest rate cuts; Especially in the second half of 2008, after the outbreak of the international financial crisis, the pace accelerated and the magnitude increased. After interest rates fell to near zero, several rounds of quantitative easing were implemented in 2009, 2010, 2011, 2012, and other years. The housing prices in the United States have been continuously rising since 2012 and are still on the rise. From 2019 to the beginning of 2022, the United States once again experienced a cycle of interest rate cuts, especially in response to the pandemic in 2020. The unrestricted QE of the US currency led to a sustained surge in US stock and housing prices. The story and patterns of the United States can represent the overall patterns of developed countries as a whole. However, some people will say that when you look at the monetary easing in Japan after the foam burst, the house price and stock price did not rise. Japan is indeed a special case, but even with some exceptions, after years of continuous monetary easing. The housing prices in Japan have still risen, and Japanese stock prices have reached a historic high this year. Japan’s foam burst in the early 1990s. After the collapse, the currency became loose, but the degree of looseness was not very significant until 1997 and 1998, when the Asian financial crisis had some impact on Japan. Especially from 1998 to 2012, Japan’s economy fell into sustained deflation, and prices fell. The decline in prices was also related to the continuous decline in housing prices. Until 2013, the newly elected Shinzo Abe launched Abenomics and decided to implement monetary easing and super loose policies. He also set an inflation target and worked hard to achieve inflation of 2%. This is actually an important turning point for Japan’s economy, stock market, and real estate market! Actively and proactively implementing large-scale quantitative easing in Japan. After the major monetary easing, Japan’s economy gradually emerged from deflation, and not only did housing prices rebound moderately, but starting from 2013, housing and land prices across Japan began to bottom out and gradually slow down. Especially in Tokyo, housing prices have reached a historic high in the past two years; However, the housing prices in many small and medium-sized cities and urban areas in Japan are still some distance away from historical peaks. Think about it, even extreme cases like Japan have seen a rebound in housing prices after a large-scale monetary easing; In core cities, it is also possible to achieve historic highs. Moreover, the current situation in China is better than that in Japan back then.
Multiple rounds of interest rate cuts in China have led to an increase in housing prices
Let’s review the impact of multiple rounds of interest rate cuts in China’s past on the real estate market. From 1996 to 2023, it was in a cycle of interest rate cuts; With the promotion of the housing reform in 1998, the Chinese real estate market began to gradually recover from the bottom since 2001. The collapse of Lehman Brothers in September 2008 marked the outbreak of the international financial crisis. China quickly began to shift from the previous interest rate hike cycle to a rate cut cycle, with a massive monetary easing; The stimulus of 4 trillion yuan from the government, the strong new policies on real estate, and so on. In March 2009, China’s housing prices bid farewell to the decline and entered an upward trend, rising to July 2011.
From November 2014 to 2015, China’s currency became loose again, with continuous reserve requirement ratio cuts and interest rate cuts. Six interest rate cuts in total. Housing prices began to rebound and fall in May 2015, and have continued to rise since then. Many cities have experienced continuous increases, with some sectors in the eastern region experiencing sector rotation and overall reaching the level of 2021. Since 2016, there has been no nominal interest rate hike, but the actual interest rates of the whole society have fluctuated. Overall, since the reform of LPR in 2019, there have been continuous interest rate cuts. In 2020 and the first half of 2021, the economy performed well, especially with the real estate market still in a prosperous period. The currency can only be said to be neutral, slightly loose in the middle. Since 2022, the entire economy and real estate market have clearly weakened. However, starting from March 2022, the United States continued to aggressively raise interest rates, with a total of 11 increases. After the super tightening of the US currency, the space for monetary easing in China has become smaller. We have also cut interest rates and reserve requirement ratios, but the pace is relatively small. We cautiously carry out small monetary easing, which weakens the support for the real estate market. The good news is that as the United States truly enters the cycle of interest rate cuts, the room for monetary policy easing in China has been opened up. By the end of next year, the Federal Reserve is expected to cut interest rates around eight times; I estimate that by the end of next year, China will cut interest rates about five times. This also means that our pace of interest rate cuts will significantly accelerate compared to the previous two to three years; Moreover, we will also increase the intensity of quantitative easing, or quasi quantitative easing, similar to the behavior of the central bank’s next purchase of treasury bond.
The housing prices in our country are bound to rise
So, in this context, when will Chinese housing prices stop falling and rebound? I feel that predicting is indeed quite difficult because Japan did experience a long period of decline back then, lasting for 18 years before stabilizing. Our country has only fallen for three years now. However, some international investment banks in the United States believe that the pace and magnitude of China’s housing price decline will be more similar to that after the subprime mortgage crisis in the United States, rather than Japan after 1991. So, Lao Yang can only say that with our monetary easing, monetary easing, and fiscal strengthening, the possibility of China’s housing prices bottoming out is further increasing. Especially in high-energy cities, the decline may stop next year.
One thing can be confirmed, the housing prices in most cities in China will gradually bottom out and rebound in the coming years. In short, we must have confidence in the basic logic and law that monetary easing will lead to an increase in housing prices!