The collapse of the Chinese dream of homeownership and the echoes of the subprime mortgage crisis
Glen Cote Newsletter 2️⃣
Happy Sunday ☀️ Welcome to the second edition of the Glen Cote Newsletter. We’re talking about Chinese real estate, school masking policy, and Washington health insurance shenanigans. Keep reading 👀
Chinese real estate is absolutely bonkers.
For years, the vast majority of Chinese home buyers — more than 80 percent — had begun making payments on their homes before construction was completed (that alone should tell you all you need to know about how a bubble formed, but let’s continue). Developers had easy access to funds and it fueled a rapid expansion as prices soared for years.
The government, hoping to ease the unsustainable housing boom while most likely breaking out in a cold sweat, implemented new lending requirements in 2020 to deter excessive borrowing. Some developers (such as Evergrande in particular) acted like a law student from the University of Phoenix and struggled to pay back their debt or even defaulted. Sales of residential property slowed way, way down, as much as 31 percent in the first seven months of 2022 from a year ealier. Investors said “screw this — I’m out of here”, pushing the sector into a downward spiral that was made only worse by a perfect storm of other immense factors, like China’s hardline zero Covid strategy, a regulatory crackdown on other private enterprises, and the absence of large-scale household stimulus.
Just those three specific things on their own were enough to bring an immense amount of economic pain, and the housing sector collapse just compounds the damage. Chinese youth unemployment (ages 16 to 24) hit a record high of 19.9 percent in July, more than twice the comparable rate in the US. This leaves about 15 million young people jobless.
Going back to the property sector, it’s important to note that the sector itself accounts for about a quarter (a quarter!!) of China’s massive economy, and over half of household wealth is tied up in housing. With financing drying up and debts coming due, the cash crunch for developers has left thousands of units unfinished, and many home owners are boycotting their mortgage payments in protest.
Keep in mind that this is China, where participating in public forms of protest is incredibly dangerous. I’m not sure if refusing to pay a scummy real estate developer for stiffing you will get you on the CCP’s naughty list, but it still takes some serious stones to risk that. The deterioration of the property sector is spreading financial pain far and wide across China’s domestic industries.
So, one of the world’s most important and globally integrated economies is teetering from a housing bubble bursting, dragging every other sector down with it, the government isn’t pumping enough stimulus into households to stymie the damage, and youth unemployment is spiking. Sound familiar? It’s unclear whether or not the global financial system — already under pressure from the highest inflation in decades, choked up supply chains, and a still very much ongoing war in Ukraine — can handle this kind of shock.
Sources:
“The Chinese dream of homeownership is crumbling. The economy could go with it” — Los Angeles Times
“China’s Housing Crisis Keeps Brewing in Beijing’s Weak Tea” — Wall St Journal
A Canadian visits America and gets held at gunpoint by a stranger
The stranger says, "give me all your money and I'll let you live!"
The Canadian replies gleefully, "Oh! You must be what they call a doctor!"
Study finds that dropping masking requirements in schools increased Covid cases substantially
A draft study comparing Massachusetts schools that maintained masking requirements with schools that did not has provided new evidence that masks work very well in making sure less people get sick from Covid. I hope this doesn’t come as a total shock to my readers.
Ellie Murray, an assistant professor at BU’s School of Public Health who was one of the coauthors of the study, tweeted this:
Researchers said their observational study found that dropping mask mandates was associated with an additional 44.9 COVID-19 cases per 1,000 students and staff over 15 weeks after the lifting of the statewide school masking requirement.
The researchers said that represented nearly 30 percent of all cases observed in schools during that time, adding up to an estimated 11,901 extra cases, meaning thousands of lost school days for students, teachers, and staff.
I almost always wear a mask when I go somewhere that’s both indoors and public. Honestly, the masking itself never felt like a big deal to me. Maybe something about the culture around America’s “rugged individualism” has something to do with why such a large portion of people make such a big fuss over masking. But even from a purely selfish perspective, masking still makes sense because it protects you from viruses and getting sick.
I wish we could just treat masking like we treat umbreallas. If it’s raining out, you take an umbrealla with you. If Covid cases are rising or a new wave is in the forecast, you wear a mask. And if having a masking requirement in place at schools can prevent thousands of kids from getting sick with Covid and help keep them in the classroom, I really don’t see a valid argument against masking requirements while there’s an ongoing pandemic.
Source: New study based on Mass. schools finds masks protected students, staff from COVID-19 — Boston Globe
Democrats extend health insurance premium subsidies by another 3 years
Last Tuesday, on August 16th 2022, President Biden signed the (rather awkwardly named) Inflation Reduction Act into law, a much smaller bill than the Build Back Better bill Democrats had intially hoped for. This was done against the opposition of every single Republican lawmaker in the House and the Senate, none of whom voted in favor of the bill.
This is the latest Covid stimulus package since the American Rescue Plan Act (ARPA) was passed in the first few months of Biden’s presidency. ARPA expanded health insurance premium subsidies by eliminating a portion of the means testing that intially came with the subsidies when they were introduced under the Affordable Care Act (ACA) — also known as Obamacare, a much more memorable name.
When the ACA became law in 2010, it offered health insurance premium subisides, otherwise known as the even more boring sounding “premium tax credits”. These were put in place to subsidize the cost of insurance plans purchased in the government run health insurance marketplace. These subsidies were designed to target people with low incomes, but fell short in two key ways: (1) the subsidies were too small, and (2) not enough people got them.
In 2021, ARPA was able to expand the premium subsidies by getting rid of the income cap that let people qualify for them. Before, if someone’s income exceeded 400 percent of the federal poverty line — about $52,000 for an individual or $106,000 for a family of four — they were out of luck and didn’t qualify. This meant millions of people paid enormous amounts of money for their health insurance premiums, often hundreds of dollars a month, sometimes in the low thousands for families. This was especially true if they were older and lived in rural areas.
This is all kind of dense, I know, so hopefully you’re still with me.
When ARPA expanded the premium subsidies to include more middle income earners, many people saved a ton of money on their health insurance premiums. Those whose income exceeded 400 percent of the federal poverty level became eligibile for subsidies if the cost of their premiums exceeded 8.5 percent of their household income.
As a result, the uninsured rate reached a record low of 8 percent in early 2022. During the 2022 open enrollment period, consumers on HealthCare.gov (the government run marketplace people can purchase health insurance from) saved an average of $47 to $128 per month, and an estimated 28 percent of all enrollees got coverage for $10 or less per month. Of the 5.2 million people who have gotten health insurance coverage since 2020, nearly half — about 2 million adults — enrolled in marketplace coverage thanks in part due to affordablity from ARPA.
But this subsidy expansion was due to run out towards the end of 2022, right around the midterm elections. Since Democrats wanted to avoid the humiliation of having millions of Americans’ health insurance costs spike right around voting time, they negotiated for months with corporate and so called “moderate” Democrat Senators Sinema and Manchin, trying to get something — anything — passed into law in time before what many still expect to be a midterm beating for the party.
Which brings us to last Tuesday, with the Inflation Reduction Act (IRA) being signed into law.
Inside that $740 billion bill, the health insurance marketplace subsidies that were first adopted under ARPA were extended for another three years, into 2025. We’ll have to deal with another batch of political bullshit when we approach the coverage cliff that year and millions of people’s health insurance plans are at risk of becoming so expensive that they can’t afford coverage, AGAIN. But for now, we’re good.
This subsidy expansion will cost an estimated $64 billion, and it’s worth every penny. No one should ever be forced to go without health insurance and risk being denied the health care that they need. A recent study found that more than 330,000 Americans could have been saved during the pandemic if the United States operated under a universal health care system – nearly one-third of the total COVID-related deaths. Our for-profit health care system is a kafkaesque monstrosity. Aetna would probably sprint to the driver’s seat to roll over a litter of puppies with a steamroller if it meant being able to deny a cancer patient chemo and save a few bucks. We can and must do better.
Sources:
Podcast: Why the Inflation Reduction Act is a Big Deal for Health Care — Health Affairs
Congress Poised To Extend Enhanced Marketplace Subsidies Through 2025 — Health Affairs
Thanks for reading my newsletter. More soon! Any feedback is appreciated - I read every comment. If you have topics you’d like me to take a look at, feel free to reach out.