News Analysis: China’s Property Bubble

Willy Lam looks at the ramifications for China as it tries to curb spiraling house prices.

Is this light at the end of the tunnel? Or just spin doctoring. The State Statistical Bureau (SSB) announced in mid-April that there was “strong evidence” that real-estate prices nationwide were undergoing a downward trend. The bureau reported that the price-tags of new apartments in 12 among 70 big- and medium-sized cities had fallen in March compared to February levels. Prices in eight cities had held steady.

Moreover, while prices continued in rise in 50 cities, the rate of increase had come down for the first time since the property bubble began to appear a few years ago. For example, in Shanghai, the prices of new homes went up by a mere 0.2 percent from February to March, compared to 0.9 percent from January to February. Government economists seem confident that coupled with the tight-money policy that the People’s Bank of China has been pursuing since last year, a soft landing in the real-estate market is in sight.

A number of respected economists have questioned the SSB’s optimistic reading. For example, Yi Xianrong, the well-respected Director of the Finance Research Centre of the Chinese Academy of Social Sciences, pointed out that “the housing bubble in China is the biggest in the world.” Professor Yi warned that government officials were just “deluding themselves and misleading others” if they said prices were coming down in a big way. Indeed, a government news release after a meeting of the State Council or Cabinet on April 13 explicitly pointed out that “housing prices are still rising in the majority of cities” and that “the situation of excessively steep price rises has not fundamentally changed.”

Through 2010, the central government introduced a series of measures to tackle the bubble. Apart from asking all banks to curb mortgage-related lending, residents face punitive taxation when buying a second apartment. Several cities also started to levy heavy taxes on profits from real-estate transactions. Earlier this year, Premier Wen Jiabao unveiled what analysts said was the “last resort,” that is, imposing a so-called “real estate responsibility system” on the mayors of 608 cities. Under this schema, these local cadres have to specify “maximum price levels” for houses and apartments within their jurisdictions; if the prices rise beyond these levels, the officials’ jobs may be jeopardized.

The result, however, is that China’s super-savvy warlords have joined hands in shortchanging the central authorities. For example, the Shanghai municipal government announced recently that the prices of apartments in the metropolis will not go up this year by a rate that is higher than either the national GDP growth rate or the rate of increase of Shanghai residents’ income. Given that the projected economic growth rate for 2012 is 9 percent, apartment prices in Shanghai can still go up by at least 8 percent!

It is of course, well-known that most municipalities do not share Beijing’s concern for pricking the housing bubble. The sale of land, in addition to housing-related taxation, remains a prime source of income for local authorities. Moreover, in 2009 and 2010, investment companies with close ties to local governments around the country borrowed in excess of 12 trillion yuan to build apartment blocs and related facilities. A drastic fall in prices would lead to the bankruptcy of the bulk of these government-affiliated companies.

Housing prices are tipped to rise for the rest of the year also because of the key factor of inflation. The consumer price index rose year-on-year by 5.4 percent in March, the highest rate in 32 months. And while the People’s Bank of China, the country’s central bank, responded by raising Chinese banks’ capital reserve ratio for the fourth time this year – to an unprecedented 20.5 percent – inflationary pressures are still strong. Much of China’s inflation is imported. Moreover, the price spirals are also due to the country’s record US$3 trillion in foreign-exchange reserves as well as the injection of hot money from developed countries. Under such conditions, both speculators and bona fide home buyers feel that properties are still the best hedge against inflation.

As with most other matters in China, economic developments such as inflation and the property bubble are intimately tied to the top priority of the Chinese Communist Party, which is upholding socio-political stability. The Hu Jintao leadership is all too aware that hyperinflation in 1987 and 1988 was one of the root causes of the student demonstrations that led to the Tiananmen Square crackdown. Irrational exuberance in the property market is doubly dangerous because of its impact on the post-1980s generation of intellectuals – college graduates in their 20s and 30s many of whom are convinced that at today’s prices, they may never afford to own their own homes.

In the past two decades, the party leadership has successfully co-opted the younger generation of intellectuals by channeling their political fervor into nationalist pursuits. If housing prices were to continue going through the roof, however, the possibility of tens of millions of angry young men and women joining the Jasmine Revolution – or similar campaigns geared toward political liberalization – cannot be discounted.

 

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