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
View as Single Page
Reddit
Digg
StumbleUpon
Delicious
Technorati
Yahoo
Google
Plurk
stubbs
> The logic was simply “If we build it, they will come.”
Will the bubble burst for a while? The property developers/local govt control the demand as well as the supply. They wall off city blocks, force out the residents, tear down the buildings, then “run out of money”, and turn the land into a carpark. The evicted residents must buy somewhere new.
samuel welsh
well pei seak some common sense to these louts
Mark
In all probability a percentage of the 0% usage electric meters are reading that way because someone has figured a way to use the power and bypass the meters.
Gordon
Not a bad theory, but I’ve lived in nice apartment buildings in Beijing where there were tons of unoccupied (and never occupied) units. In this case, it’s common knowledge on the ground that there’s a lot of unused housing, and power bills are used to get an approximate figure on how much is unused.
smiley g
35 years ago when I was a newly return graduate, I happened to co-share a rented house with a HongKie in Kuala Lumpur, we never paid electricity bills because this Hongkie – the chief tenant if you like – knew how to rewire the cable to bypass the meter! So, not an improbable theory indeed.
Eric Enno Tamm
While researching my book comparing reform during the Qing Dynasty and Communist China, I spent a week touring Xi’an with an American trade delegation from Silicon Valley and local Xi’an officials. We toured a Hi-Tech Economic Development Zone, Export Processing Zone, Ecological Zone and an aerospace manufacturing zone. In all cases, local government had expropriated land from peasants, probably paid meagre compensation and rezoned the property for industrial use, which caused its value to soar. The Administrative Committees of these zones, run by Communist Party bosses, then used this inflated capital value to get loans from state-owned banks to begin developing the property. The local government now needed foreign investment to bring technology, innovation and capital to these properties to realize their vision. However, in all our meetings, no one produced one feasibility study, survey of property demand or any other financial statements so typical in the West. The logic was simply “If we build it, they will come.” Prof. Pei rightly points out how flawed and fragile this strategy is. Chinese taxpayers will, unfortunately, pay for this real estate bubble. However, it should be mentioned that Chinese farmers have already paid for it through the illegal expropriation of their land or through the poor compensation paid to them — one of the biggest causes of social unrest in China. For more info about my book, check out http://horsethatleaps.com.
Will
Tks for your reseach,professor,as a Chinese,you are right-minded and brave,I agree with your some opions,but most importantly ,as individul,we may not changes some big things ,there are still something we can do.We are Chinese,not Amercan,Europeans and so on.The mission of modern youth in China,let the world know,we are Chinese,we are ordinary pepole ,hoping to live happy life,not evil.Just human.Do not think we come from other world,ok?
Second Advisor
I would advise the people not to foot the bill. Instead, I would advise the people to make the government let the bubble burst, so that property value would fall until it hits lowest value. Just look at America as a great example. When the Housing market burst, what did bailing out the bank do. NOTHING, except helping inflate the value of the housing market instead of letting it fall to lowest value. I remember hearing that Chinese citizens have trouble finding affordable property. So, bailing out the banks would just help keep up the property value, and continue on an inefficient property market. That is why there is bubbles in a capitalist market. When properties are overvalued, the market will burst, and the value of property will come down to a price that is reasonable for the average Chinese citizen to afford.Its just like supply and demand economic.
First Advisor
While I agree with the theme of Pei’s remarks, I would note two additions. One, local governments won’t necessarily stop frivilous infrastructure projects, if the projects are owned by wealthy and influential associates of the officials. Two, although the idea may be unrealistic and impractical, it remains true that China has no property tax, and the State Council is, technically, capable of creating a property tax whenever the technocrats wish. Such a central property tax could be very specifically targeted, to only new condominiums, for instance, since property law in China is very vague and diffuse to begin with. It was surprising that Pei didn’t mention the possible use of a property tax tool as a method of gentle persuasion in a real estate bubble, and perhaps indicative of just how alien the governance technique of a property tax is to the Chinese.