By Minxin Pei
There’s little doubt China has a real estate bubble. The only question now is when taxpayers will have to foot the bill for it.
Everyone knows that financial or housing bubbles are bad for any society’s economic health. Yet such bubbles brew all the time and spare no societies, regardless of whether they are poor or rich, authoritarian or democratic.
So why do bubbles keep occurring if they’re bad for society as a whole? Because they’re still good for a small minority—after all, if bubbles are bad for everybody, then it’s inconceivable that they’d be created in the first place. And at the moment, based on conventional measures, China is Exhibit A for anyone wishing to see a runaway housing bubble.
For example, the vacancy rate is sky-high, a classic symptom of speculative real estate investment. Chinese authorities recently disclosed that, based on monthly readings of electric meters, 65 million housing units in Chinese cities register zero power usage, indicating that they are unoccupied. The ratio of a property’s listed price to the amount required to rent the same property in large Chinese cities is 500 to 1, compared with the global average of 300 to 1. Until July this year, urban housing prices had been rising at double-digit rates. The average monthly increase from April to June (compared with 2009) was, for example, 12.2 percent.
But before looking at who will pay when the bubble eventually bursts, it’s worth figuring out first who benefits from China’s ‘irrationally exuberant’ property sector.
It’s tempting to point fingers at individual speculators. But while individual speculators certainly share some of the blame for the froth in the housing sector, they are not the primary drivers of sky-high housing prices.
There are two principal culprits here. First, local governments are perhaps the most important contributors to the housing bubble. As the real estate sector (land prices and taxes) generates more than 40 percent of the fiscal revenues of local governments, they’ve been intentionally driving up land prices to reap additional proceeds and use inflated land under their control as collateral against bank loans. Despite Beijing’s pledge to increase the amount of low-cost housing, local governments are dead set against such a policy because building low-cost housing means lower land sale prices and lower real estate transaction taxes for them.
The other culprit is state-owned enterprises. Many of them want to make a killing in the lucrative property market. With access to almost unlimited no-cost credit from the state-controlled banking system, these behemoths have abused their financial clout and plunged headlong into the real estate market, snapping up high-priced land and investing in high-end residential housing units that now sit empty across the country.
Photo Credit: Thomas Berg
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len-nin
One of the flaws with the property market in China is that the central government wants the inflation down as well as property price but refuses to let the market correct itself from the speculators. The reversal in money tightening policies is, arguably, too soon … It is letting speculating developers and buyers off the hook. It should let the speculator go bankrupt en masse. The government shouldn’t worry too much about those who bought apartments at a high price and not letting them lose de to reducing property prices. And it mustn’t worry too soon that a downturn in property market will kill China’s economic boom and therefore a need to re-boost the property market again. You can’t have your cake and eat it. You have to go with the cycle. It’s about managing the cycle. Rest assure the property market prices goes down slowly but shoots up immediately when the market senses speculative killing to be made. And the market are all the consumer market who have money. WHile this is all theoretical and the government have to deal with the real world, I strongly endorse the government building low costs apartments by the millions. It is something they should have done this long ago to manage the supply and demand so that property – land and apartment – prices can be managed macro-economically.
In many ways, this episode reminds me of the Far East Asian countries opening up their economies in the 1990s to hot money but haven’t the controls in place to handle the massive inflow and outflow of billions of hot money into their stock and property markets from Wall Street. In this regard, the central government failed to understand the need to put controls in place even as they allowed the mad rush to expliot the potential wealth to be reaped from property development. A C- for them but better late than never in preventing a radical burst of the bubble.
Frankie Fook-lun Leung
You under-estimate the chinese government’s capacity to solve real estate vacancy problems. About twenty years ago, the Pudong region of Shanghai was over-developed with many high-rise buildings being vacant. The Chinese government gave an order that any foreign banks which did business in Shanghai had to have an office in Pudong. Now Pudong is the region with so many foreign banks having offices and that initial movement subsequently attracted other enterprises foreign and domestic to gravitate towards that area.
Frankie Fook-lun Leung
The on-going debate on china’s hard or soft-landing is somewhat misplaced. The commentator is predicating his observation that china’s economy follow a market economy pattern. There are cycles. China’s economy is by their own admission is a socialist economy with chinese characteristics. Therefore, using conventional western economic analytical tools may not be the right instruments. Then, what should we use. Nobody has yet come up with a credible answer.