Chinese shares fell the most in two years on Monday as the Shanghai stock exchange’s property index tumbled 9.25 percent. Late on Friday, China’s State Council had announced a new set of policies designed to cool down the housing market.
Economic data released in the last few days has called into question the strength of China’s recovery. It may be that Beijing is so confident in the health of the economy that it can afford to squeeze the real estate sector harder. Or it may be that the government is so concerned about the social implications of a resurgent property market and the effect that real estate may have onthe effort to rebalance the economy toward consumption from investment, that it is willing to take that risk.
The new rules include a 20 percent tax on gains from a sale, higher down payments and mortgage rates, and requirements that cities set annual price easing targets. The announcement was met with both skepticism and criticism.
This latest round of real estate controls is the ninth in the last 10 years, yet prices have increased markedly, and some on the Internet questioned the legality of levying taxes through administrative means and called for much more transparency and accountability in how the government might spend the proceeds.
Clearly investors are spooked, though as Yao Wei, chief economist at Societe Generale CIB wrote, accor! ding to Reuters:
“The actual impact of the new policy can be very severe or not severe at all, depending on implementation. But the wording is unexpectedly harsh. … In three months time, the impact may not be big at all. But it has stirred very high negative expectations.â€
The announcement on Friday spurred a surge in existing home transactions. Some analysts, and most of the people with whom I have spoken, expect the tax to have the perverse effect of driving up the price of existing homes, as buyers will have to cover most of the tax, and pushing more of the sale into a side contract to hide both the true price and gains from the government.
The real estate market in China is already quite distorted, and these repeated rounds of repressive policies may be just layering on more distortions. But the changes required for a more rational housing market are so difficult that in the near tem it is easier to try to manage through administrative fiat.
In a bit of good timing for CBS, this week’s “60 Minutes†had two segments on Chinese real estate. The first was an interview with the billionaire developer Zhang Xin, chief executive of Soho China. “China’s Real Estate Bubble,†the second segment, examines the phenomenon of “Ghost Cities†that many China bears have highlighted over the last several years, complete with visits to the same empty malls and developments that we have been hearing about for years.
Jonathan Anderson of Emerging Advisors Group is out with a provocative report about! those ghost cities. In “Hurray for Ghost Cities,†Mr. Anderson argues that these wasted investments are not really a big deal, adding that it might be better that the money was blown on developments rather than even more excess manufacturing.
Tom Miller is also mostly dismissive of the “Ghost Cities problem†in his excellent new book “China’s Urban Billion.†In one chapter, Mr. Miller writes:
The truth of the matter is that China is not building too many apartments, and a handful of empty urban districts are not evidence of a giant property bubble. Chinese property investment may be inefficient, but it is sustained by a huge, growing and sustainable demand for new housing. …
China’s current modern housing stock, defined as homes with individual bathrooms and kitchens, is around 150 million units. But 200 million migrant workers currently live in dormitories or slum housing. If one believes that te urban poor deserve to live in proper flats, the corollary is that Chinese cities actually have a significant shortage of housing - somewhere in the region of 70 million units. China is not building too many new apartments; it is building too few.
I do not mean to completely dismiss some of the dangerous imbalances that have been building in certain property markets across China. But China is not one real estate market, and taking a binary boom-or-bust view about the “China market†is likely a mistake.
The Financial Times examined the diverging markets last week, writing:
China takes bifurcation to a new extreme. Not only are housing prices in the biggest cities moving in a different direction to those in smaller centers, there is also a glaring discrepancy in the amount of development being undertaken.
The country’s main metropolises - Beijing,! Shanghai! and Shenzhen, which each have populations of more than 10 million - suffer from chronic shortages of housing for low- to middle-income residents. By contrast, scores of smaller cities with populations of up to 3 million face an increasingly severe oversupply.
This is why a simple description of China’s housing market as a “bubble†misses the point. Does “bubble†refer to the soaring prices in the biggest cities, where only the wealthy can afford homes Or does it refer to the row upon row of empty apartment blocks in the smaller cities
One of the crucial questions, for which very smart people offer very different answers, is can bubbles burst in certain areas without bringing down the whole economy
Regardless of how that question is answered, we should perhaps give China’s leaders some credit for acknowledging potential bubles and taking steps to rein them in. What might have been different if American policy makers had recognized and tried to manage the risks of a housing bubble in 2005, 2006 or 2007
