Elite Inside Trader

Currently, home values in the United States equate to roughly $15 trillion. The mortgage debt on those homes? 80%, give or take a few percentage points. Home values in China also equate to roughly $15 trillion, however the mortgage debt on these homes (and we’re referring to lower and middle class only) happens to be a bit lower than that of the United States. The number? Zero!

It is easy to suggest that this astounding economic insight better enables us to grasp the underlying forces impacting the economic power shift we are seeing from West to East. As a quick side note on the subject of debt, let’s also take a moment to remember the positive effect the judicious use of debt has had over the past 50 years. How’s that you ask? In truth, most of the global expansion that has occurred over the past 20 years, would not have occurred without the U.S.’s debt financed spending binge so let’s not pretend otherwise. Countries love to complain about the amount of debt the United States has accumulated, but they have also enjoyed “going along for the ride”.

Based on GDP, the economic power of Japan and China lag far behind the U.S. at only $4 trillion each, followed by Germany which currently sits in the $3 trillion range. Maybe if countries such as Germany which leads the Euro block, had been willing to accept higher debt levels as a growth driver, then German GDP would also be proportionately higher? China has also done more than its fair share of racking up serious debt loads via broad-based economic stimulus lending during these past few years. However an enormous differences lies in that Chinese lower and middle class households stand admirably alone as 30% plus cash-rich savers are bursting with a far less talked about piece of the world’s economic puzzle; trillions in mortgage-free, fresh home equity.

The Miracle Of China’s $15 Trillion In Home Equity Power

Let’s argue for a moment that the U.S. mortgage – China equity numbers we started with could be too general or generous to be meaningful. However, digging deeper to the history of property appreciation in the U.S. and China, that argument falls flat fairly quickly and for an amazing reason. A key economic growth curve which required 40 years in the U.S. economy has run its course over a much shorter 10 year period in China. What looks like an economic miracle is really no more than the top of mind, exciting, yet vexing subject in today’s world known as the accelerating rate of change. Accelerating rates of change are a characteristic of this generation broadly impacting our lives.

United States Middle Class Home Equity and Mortgage Levels

U.S. middle class suburban home prices starting back in the 1960′s were in the range $30,000 to $60,000. Those millions of homes today fall in a price range property value of $90,000 to $250,000. A time span of over 40 years was required to achieve that range of 3 to 8 times appreciation in price; a long slow appreciation curve. Can we confirm that the average home equity is perhaps in the 20% range currently? Yes we can. 30% of homeowners in the U.S. have no mortgages. The remaining homes with mortgages barely have a dime of equity with most reports indicating that 30% of U.S. home owners are upside down in their mortgages.

China’s Middle Class Home Equity

Now let’s take a look at China’s home property price appreciation curve. Property value appreciation that took 40 years in the United States has occurred in China in just 10 years. That unprecedentedly steep curve in China’s economic expansion explains a large proportion of the rising shift in economic power towards China. $15 trillion of home equity with no mortgage debt lends even more light on our global new reality. Imagine how much better shape the United States would be like if 50% or more of households were free of their mortgage payment.

Comparing Home Values in China

Looking back only 10 years to 2001, China’s 1st tier cities such as Shanghai, Beijing, Guangzhou and Shenzhen had similar local apartment prices as the United States did in the 1960’s, falling in the range of $30,000 to $60,000. Home values in the mainstream 2nd tier cities such as Dalian, Shenyang, Tianjin, Chengdu, were lower by half again, more like $15,000 to $30,000. A couple of quick calculations tells us those prices translate into the $30 to $75 per square foot range.

Follow Up:

Those millions of typical, middle class apartments all across China are mortgage-free. Did you know that home mortgages, let alone credit cards, hardly even existed in China in 2000? They probably didn’t even have Chinese characters back then for the phrase “credit cards”.

Only 10 years later, property in the 1st tier “property bubble” cities have increased in value an average seven-fold from the $30,000-60,000 to $200,000-$400,000. While in 2nd tier cities, property prices have increased a much more reasonable four-fold from $15,000-$30,000 to well within the $60,000-$120,000 range across a much wider swath of Chinese daily society. Considering normal long term global economic cycles, inflation and property values, the $60,000-$120,000 price range is likely to act as a minimum long term price range floor for those millions of households.
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Tags: China, China First Tier Cities, China Mortgage Debt, China Property, China Second Tier Cities, Chinese Middle Class, Euro Block, Germany, Home Equity, Japan, Shanghai, United States, United States Middle Class, United States Mortgage Debt, United States Property