The Best Cure for Low Prices is Low Prices

The week ended on August 1, 2025, interesting news items to look at this week are:

The Best Cure for Low Prices is Low Prices: For the past month, Youtube’s algorithm, according to my profile, has thrown out a lot of videos concerning cut-throat pricing on real estates in China, about shop closures and big shopping malls devoid of shoppers. There were extensions of such real estates slumps to ghost villages, towns and even certain pockets in urban areas. Well, I suppose I did take an interests in the Greater Bay Area as a while ago I was very tempted to buy a property there for my retirement/vacation living.  From the perspective of the video producers, they were horrified by the steep decline in prices and completely lost hope in how the slump would end. On the other hand, Australia where I live right now is having a property crisis of another kind, sky rocketing rent and home prices is shattering the great Australian dream of every family owning their own home. In Perth 76% of homes were sold within 8-13 days and for Brisbane the medium selling period is only 21 days. (Fig. 1).

Now we all know China is the largest trading partner of Australia and accounts for 25.7% of Australia’s total goods and services trade and is larger than Australia’s next 3 trading partners combined (US-11%, Japan-9% and South Korea-5.6%). Being so close to both property markets, the dichotomy compels me to devote at least a weekend to understand what happened and to form a framework as to when the respective predicaments in both markets should end.

(i) Text Book Property Cycles: Historically in many markets property prices and construction activities go through a 7 year cycle because it typically takes 7 years to deliver the final product to consumers from planning, land acquisition, approval, construction and certification for safe occupation. Speculative land acquisition were made when prices were buoyant and by the time of completion, a glut would appear and prices would decline. (Fig. 2).

With my prior experience working with the two largest property developers in Hong Kong and also in the materials industry across Asia including China, Japan, South Korea and Indonesia I can attest few developers and government officials make non-linear forecast as to supply and demand and none takes long cycles into consideration. It is the long cycles superimposed on text book short property cycles that has become lethal in many markets without exception.

(ii) The 50 Year Long Interest Cycle: We have just witnessed the end of a near 50 Year interest rate down cycle from a peak in September 1971 to March 2020. (Fig. 3).

Within this period the text book standard risk free asset (USGG10YR) has an interest rate decline from 15.84% to 0.54%.  When the price of money had such a significant decline over such a long period of time, demand of money will increase and correspondingly price of goods and services will rise as a function of the decline in purchasing power of currencies. From March 2020, everything changed. By May 2021, the 10YR Treasury Note hit a peak of 5.43%. This whiplash of interest from March 2020 of 0.54% to 5.43% in the short 15 months period meant even for this risk free asset, US Bond and Note Prices has had a cascading waterfall decline of a minimum of 35% in Bond Prices. As globally all other asset class are priced off the US 10 Year Treasury, local real estate price decline should be within a striking distance of 35%, give or take adjustments due to unique local circumstances in scale and in timing only.

(iii) The 50 Year Property Bull Run in China: On top of a 50 Year Interest Rate Decline Cycle, China’s property sector has also benefited from an urbanization momentum unparalleled anywhere else in the world. (Fig. 4).

One of the key drivers for China development and urbanization was the 21 year US led embargo against China from 1960 to 1971. When a hard working, studious people with a frugal savings habit are locked out from interaction with the developed industrial world, the energy released at liberation is something miraculous. Compared China urbanization rate with countries of similar per capita GDP, e.g. Mexico and Thailand, one will see how China’s industrialization has driven her urbanization and real estate demand. (Fig. 5).

(iv) Importance of the Construction related Sector: Globally construction-industry-related spending constitute about 13% of GDP. However in China, due to the momentum in urbanization, property-construction-services (including finance and related) contributed a whooping 30% of GDP. Even for a very matured market like US, every job lost or gained in real estate and construction would have a multiplier effect of supplier and induced job lost or gain by a factor of 9~10. (Fig. 6).

This means every 100 job lost in real estates would eventually lead to a total of 900 jobs lost in the economy and vice versa. It was reported that the real estate sector in China would impact over 50 industries and business sectors and I am not a bit surprised. As an illustration, the US Real Estate Sub-Prime fiasco which started the GFC caused a blow-up of US Money Supply M1 by $19 trillion and everyone is still paying today in terms of cost of living pressures and will continue to pay for the US fiscal/economic/monetary mismanagement due to the reserve currency transmission mechanism. (Fig. 7).

We will not be spared with the effect of China’s mega property bust. Unlike the US, the adverse rescue effect to other countries was through the payment chain , currency loosing its purchasing power and cost of living pressures. For China it will be through the supply chain causing unemployment and lost of pricing power. In 2008, China helped the US and almost single-handedly picked up the slack in global demand from the GFC but this time round US wants to bury China when she is down. This bad karma will guarantee an adverse impact on the Anglo American Empire as all the scheming and maneuvering are still fresh in the memories of world leaders.

(v) Reverse Urbanization and Mass Internal Migration: In 2021 population of China peaked and thereafter annual deaths exceeded births. Before China property bust, people from rural area flocked to the cities seeking employment and a more prosperous life. The demand for accommodation in urban areas  had a positive multiplier job effect and consumption expanded. With the property bust and job losses, migration is reverse thus exacerbated vacancies and loss of employment. In speculative overbuilt area, it is not strange to have real estate price decline as much as 70% when forced liquidation becomes an everyday event in every neighborhood. The 2024 population survey in China shows only 8 of the 31 Provinces and Administrative Regions in China had a year on year population growth. The growth regions are recognized as areas of better than average employment prospects. Of interests there were also remote pockets of speculative overbuilt with property prices crashed to pennies in the dollarn yet there were population growth. The reason: costs of living became so cheap that even without full time employment young people reckon they could wait it out until conditions improves. In these pockets young people were willing to both rent and buy at the much lower prices. In one sense, a young person’s aspiration of home ownership became a reality simply by market forces. It is ironic that the largest socialist country in the world is practicing true capitalism because there is no such thing as “too big to fail” in China. The best cure for low prices is low prices.

Having presented the foregoing data points, my conclusion is that urbanization in China will continue but at a slower pace. (Fig. 8).

I estimate the Chinese real estate froth is a US$3 trillion problem and China will not follow US footsteps to inflate away the property slump but risks a bigger crisis later on. On pure economics, China’s property market is likely to stabilize only in 2027 with a steady recovery to peak again in 2034. For what is worth a Goldman Sachs report in June also reckoned the current slump in China property prices will last until 2027. (Fig. 9).

Taking geopolitical factors into consideration, I reported in my July 4^th Blog titled “Point of Exhaustion” that the breaking point for the Federal Reserve to start forever money printing latest by January 2027. So my friends, this winter will have another 18 months to run and the economy is not going anywhere fast. So be well fed and keep warm and may the peace of Christ rule in your heart.

Colossians 3:15  And let the peace of God rule in your hearts, to which also you were called in one body; and be thankful. 16  Let the word of Christ dwell in you richly in all wisdom, teaching and admonishing one another in psalms and hymns and spiritual songs, singing with grace in your hearts to the Lord. 17  And whatever you do in word or deed, do all in the name of the Lord Jesus, giving thanks to God the Father through Him.