Market downturn coming soon? 2025-2026? I dont believe it will be a major downturn.

 I was talking to someone in Rimbar, KL about a week ago and the topic of whether there would be a downturn coming soon. He mentioned that a lot of rich people expect there to be a major market downturn. The reason for this is that there has been too much money printing. They expect there to be a "hong hai", or red sea coming soon(red sea as opposed to blue seas). I don't think that this is the case(At least not in the immediate time period). 

There is a good youtube video called How The Economic Machine Works by Ray Dalio, explaining how credit works. This is really just extrapolating some concepts in the video. Mainly credit.

The 2 largest economies, US and China have healthy real estate markets. 

The following chart is relevant. It is the Housing supply chart of the US Market.

Notice the housing supply line? It has been consistently below 0 since the early 2010s due to the 2008 financial crash. This means that there has been a growing undersupply of houses in the US for over a decade. The undersupply is estimated at anywhere between 3 to 7 million homes. Unlike the rapid spike in housing prices in the early 2000's. There has not been enough construction of housing for over a decade in the US.

Traditionally, serious crises have always been financial crises, or credit events that are associated with large banking defaults aka large financial institutions going under and shrinking credit. These crises have almost always been linked to a collapse in fixed asset prices. A large collapse in the mortgage market that is self reinforcing, or bank runs that lead to credit freezing(1929, 2008). The Savings and Loans crises in the US in the 80's also mirrors such a major crises. 

Neither one of these are present in the US now. There is no large scale default of housing mortgages in the US because there is no imminent crash in housing prices in the US, Why? There is a chronic shortage in housing in the US and it is getting worse every year. Note the housing construction sector in the US. I will take Toll Brothers, a housing construction company in the US. Its share price in the last 5 years is stratospheric, due to the shortage and rapid rise in housing prices.

Notice the rapid spike in Toll Brother's share price? That is because there is a rapid rise in housing prices in the US(Toll Brothers sell houses). This has partly been attributed to the rise in interest rates to combat inflation. However, the rise in housing prices is unlikely to be short lived, as there is an ACTUAL housing shortage in the US. So no sharp drop in fixed asset prices, banks are likely fine. The regulatory framework that came up post the GFC(Basel accords. etc etc) has also strengthened the financial system. The banking system in the US is likely at a very healthy level. This is also something I've heard of anecdotally, from some guy who did the restructuring in AIG. 

There are also talks on the ground by investors like Neal Bawa on the state of the housing market in the US. Anecdotally, the market is healthier than most people think it is. 

In China, there has been a government driven policy to reduce systemic risk in the real estate market. Primarily in the real estate developers side in China. However the bankruptcies of multiple large developers in China has led to a sharp slowdown in real estate activity in China. In both the construction sector. As credit has dried up for overleveraged developers, as well as in sales volumes. Many house buyers have withheld their purchases in fear of the developers going bankrupt.

The government policy is the 3 red lines. A government mandated regulatory framework for developers that are tied to the ratio of debt to equity, assets and cash. Developers who breach multiple red lines have their credit availability slashed or removed until they do not breach the framework. This was established in late 2020 and has been remarkably effective in slowing the entire industry down for the last 3 years(2021-2024). A number of major developers have gone bust and sentiment in the real estate is at its lows. The policy has arguably been too effective, as the sales and prices of houses in China has plummeted. Not only have the developers been tightening their belts, the large number of bankruptcies among major developers have led to home buyers to shy away from purchasing new homes. The drop in sales has led to a downward spiral in the creditworthiness of the developers. The downturn is truly fierce. The largest developer in China, Evergrande, has already announced its bankruptcy. Country Garden, the developer of forest city in Malaysia has also gone bust, Shimao and many other large developers have gone bust.

The sharp downturn has cleaned the system, and there is now pent up demand for housing as Chinese investors are on the sideline waiting for the market to come back. There have been various attempts at stimulating the market in the last few years, but none as comprehensive as the recent attempt. I will pull a snapshot of an article talking about this:-

China’s 2024 stimulus package aims to address economic challenges stemming from a prolonged property market slump, weak consumer confidence, and slowing growth. As such, the package introduces several measures aimed at revitalizing key sectors, with a focus on monetary easing, property market stabilization, and bolstering stock markets.

" Monetary easing measures

The PBOC has rolled out aggressive monetary policies, including a more substantial-than-expected reduction in both the policy interest rate and the RRR. The RRR will be cut by 0.5 percentage points, which will inject around RMB 1 trillion (US$137 billion) in liquidity into the financial system. The RRR may be cut further by 0.23-0.5 percentage points this year.

Additionally, the seven-day reverse repo rate—the PBOC’s key short-term policy rate, used to manage liquidity in the banking system—will be cut by 20 basic points to 1.5 percent, and the loan prime rates (LPR) and deposit rates will also see reductions to boost lending.

These measures aim to ease credit conditions and support public investments, although the appetite for credit remains subdued across sectors.

Property market support

The stimulus includes specific actions to address China’s troubled property sector, which has been in decline since 2021. Mortgage rates on existing homes will be lowered by approximately 0.5 percentage points, delivering an estimated RMB 150 billion (US$21.1 billion) in interest savings for homebuyers. This measure is designed to stimulate household spending and investment while alleviating financial burdens."

This is just the latest major stimulus, and there are further follow ups to ensure the real estate market in China recovers. This marks what I believe to be. The very bottom of the real estate market in China. Here is a graph of housing starts in China. I believe this has been the longest drop in housing starts in China, The housing collapse in 2014 lasted for 2 years. This one has been going on since 2020 and will likely bottom in the 4th quarter of 2024. I suspect the figures will follow the stimulus.

It's been going down for 4 years. I will give a chart of housing starts in China. I do believe this has never happened in China for the last 30 years, likely longer. There has never been a period where housing starts has fallen by 4 years or more. The drop is precipitous, something like 40 to 60% less than what it was in 2019. Current housing starts are trailing housing sales. Which has also collapsed. My point being is that this is artificial and has likely led to a real estate market that will rebound strongly in the coming years. The fat has been cut out. I suspect it has cut further into the real estate market than was needed.

The following is the housing starts in China.