Beijing’s New Challenge:
China’s Post-Crisis Housing Bubble
九重城
July 1, 2010 Pieter Bottelier
Summary
•China’s residential property bubble (concentrated in major eastern cities) is mainly the result of excessive domestic credit expansion in 2009. Contributing factors are significant “hot money”
inflows from abroad, low (government mandated) bank deposit rates, a widespread property speculation mania, corruption, and incentives for local governments to drive up land prices to augment local fiscal revenues.
•Beijing is keenly aware of the associated risks and is determined to control the property bubble.
The central bank has begun to tighten monetary policy, but cautiously, so as not to kill recovery in the broader economy. Around the middle of April 2010, the State Council (China’s Cabinet) introduced tough administrative measures aimed at curbing property speculation—mainly by reducing credit availability and increasing its cost—and announced plans to significantly
increa housing supply, especially at the lower end of the market.
•China does not share Alan Greenspan’s pre-subprime crisis view that financial regulators cannot recognize a bubble, are unable to effectively control one if they e one, and that it is easier to clean up the mess after it has burst than to deflate a bubble.
常用的成语•Given the central government’s apparent political will to control the bubble and the considerable arnal of policy tools at its disposal, a “soft landing” is unlikely. If Beijing can keep the bubble within bounds, it is likely that an uncontrolled meltdown will be avoided,干鲍鱼的家常做法大全
though a market correction (of 20–30 percent on average) over the next 6–12 months is likely.
•Social issues associated with China’s property bubble are at this point as or more compelling than financial issues. Housing affordability for first-time home buyers in major eastern cities has become a major social and political issue. It is a source of potentially destabilizing public discontent, even if the property bubble can be controlled.
Background to the Current Bubble
Property markets and property bubbles are relatively new to the PRC. Most residential and commercial real estate in urban China was state-owned until the late 1990s; the allocation of apartments (and rent levels) was determined by “work-units” of the state. In the wake of the Asian financial crisis of 1997–1998, the government significantly accelerated urban housing privatization. This was accomplished in only a few years, in most cas by simply transferring ownership of apartments to current occupants, far below (potential) market value.1 At the same time, the government encouraged the development of a commercial housing industry and mortgage financing. The motivation behind the major urban housing reforms—probably the largest privatization and wealth transfer in history—was to make state-owned enterpris—until then responsible for the hous
ing of their employees—more competitive by relieving them of costly social burdens. A condary objective was to create a large source of domestic demand for home improvement and new construction to counterbalance the negative effects of the Asian crisis on China’s economy.
By 2003 a vibrant commercial housing market, supported by a rapidly growing mortgage industry, had developed and private home ownership had become the norm. Labor mobility, productivity, and international competitiveness incread significantly as a result. When initial ownership restrictions expired after a few years, many middle class families capitalized on the implicit wealth transfer they had received and began to acquire one or more additional apartments for investment purpos, often with the help of mortgage loans. For numerous ordinary Chine families, wealth accumulation started in this way. Rich families, including many overas Chine, also began to e apartments in China as attractive investments.
In spite of high and rising vacancy rates, urban hou prices incread briskly (estimated at about 30 percent per year on average in big cities between 2002 and 2006).2 By the first half of 2007, ast price inflation was getting out of hand. The economy was overheating and property markets (residential and commercial) were booming into bubble territory, as was the stock market. The government became concerned that the bubble might burst and drag the economy into a slump as h
ad happened in Japan after its twin (real estate and equity price) bubbles burst in 1990–1991. In the cond half of 2007 and early 2008, to cool property markets, the government tightened monetary policy and impod restrictions on developer loans and retail mortgages. The effect of the measures was to drive down property prices (but only moderately), while significantly slowing construction and broader economic growth. The stock market collapd at the end of October. The government had over-achieved its objective of cooling property markets, a lesson that plays a significant role in the conduct of monetary policy at prent.
To compound China’s economic problems in the first half of 2008, export orders began to fall, as the U.S. financial crisis was building. When the
economy slowed more sharply than expected, Beijing became very concerned. To protect export jobs, it re-instated the dollar peg that had been discontinued on July 21, 2005. Then, in September 2008, after the collap of Lehman Brothers, global financial markets froze and exports collapd. The economy almost came to a standstill in the last quarter of 2008 (Chart 1). When the government announced its RMB4 trillion ($586 billion) stimulus program in the first week of November 2008, the measures that had been taken in late 2007 and early 2008 to cool the property ctor were reverd. Beijing understandably thought that the best way to quickly increa domestic demand an十月一日
d create jobs—countering the effects of the property slump and falling external demand—was to revive the urban housing market and new construction with various incentives.
The government was as effective in reviving the housing market in early 2009 as it had been in cooling the market a year earlier. Major factors that helped turn the economy around quickly were: (1) the near-perfect alignment of interests between the central government in Beijing and local governments wanting to take advantage of stimulus programs, and (2) the considerable experience that existed at all levels of government in the preparation and implementation of stimulus projects.3 The alignment of interests broke down in the cond half of 2009 when Beijing became once again concerned about economic overheating, while many local governments were stoking local real estate markets and driving up land values to increa revenues from land leas.4 There are similar conflicts of interest between Beijing, large property developers, and apartment owners. Such conflicts of interest can only be overcome if Beijing is prepared to exerci strong “political will.” Indications are that, in its efforts to keep the current property bubble within bounds, Beijing is determined to prevail.
Features of the Current Bubble
Fueled by about 30 percent (stimulus-related) money and credit expansion in 2009—more than double the “normal” rate—property prices climbed steeply in 2009 after they had stopped falling around March.5
The speculative nature of much housing demand is illustrated by high vacancy rates in many towns and cities. Apartment vacancy rates of 30–40 percent are apparently not uncommon in some eastern cities. Sometimes, finished apartment buildings are kept off the market by developers who expect to get a higher price next month; other apartments are left unoccupied by abntee home owners/investors with plenty of money.
The bubble is also fueled by “hot” money inflows from abroad (due, in part, to the U.S. Federal Rerve’s current low interest policy which has unintentionally turned the U.S. dollar into a “carry trade” currency in recent years), expectations of exchange rate appreciation and speculation (sometimes by state-owned enterpris or local governments anxious to drive up land values so as to increa local revenues). Most urban governments in China
derive a significant part of their revenues from long-term land leas for development purpos.6 Average housing prices and the rate of change in prices differ a lot from city to city. (Chart 2).
Facing an overheating economy and red-hot residential property markets once again, Beijing began to tighten monetary policy in early 2010 and is trying hard to reduce speculative demand for housing through a variety of administrative measures, incentives, and instructions to local governments to make more land available for low-cost (subsidized) rental housing and “economy” commercial housing.7 State owned corporations involved in property speculation were ordered to exit the market after completing projects under construction. At the same time, Beijing announced plans to significantly increa the supply of land for property development and of state-sponsored low-cost housing (the plan includes 470,000 low-rent housing units, 2.5 million “economy” housing units, and 2.8 million units in renovated shanty towns). China’s stimulus plan of November 2008 included a large amount of central government subsidies for low cost housing for the first time.
The introduction of a western-style property tax is under active consideration; in the cond half of April the government designated 4 cities (Beijing, Chongqing, Shenzhen, and Shanghai—after the EXPO) to begin property tax experiments.8
In asssing the central government’s ability to control the current property bubble, it should also be remembered that Beijing can, and often does, exerci considerable influence over markets and the behavior of local governments through political (Communist Party) channels.
便便黑色
The immediate effect of the April measures by the State Council was to suppress demand for commercial housing and to slow applications for new development licens. Market turnover declined sharply. There is anecdotal evidence of modest (5–10 percent) price declines in some cities, but in Shenzhen prices reportedly continued to ri. The strongest market reaction, however, came in the form of a 5 percent price one-day drop on the Shanghai stock exchange the day after the announcement of measures to reduce property speculation.9 In some cities there are reports of developers offering buyers an implicit discount in the form of free or subsidized furniture for the apartment.雪花漫天
Uncontrolled Collap of Housing and Financial Markets Unlikely
蛋糕的制作教程Parallels between America’s housing bubble earlier this decade and China’s now are weak. A more meaningful comparison is with Japan’s property bubble in the late 1980s, but even there, there are significant differences. The biggest is that Japan was already rich and fully urbanized when its property market collapd in 1991; China is still rather poor (average per capita income
is only about $3,500), rapidly growing and rapidly urbanizing. China’s urban population is expected to grow by veral hundred million over the next 20 years. Demand for urban housing will be very str
ong for many years to come. This will put a floor under the lower end of the market. Moreover, space for urban development in eastern China (where the bulk of the population lives) is limited. If China continues to grow fast, it is probable that its high-end urban real estate will rank among the most expensive in the world.
The current property bubble will probably lead to price corrections later in 2010 and/or 2011. Corrections at the higher end of the market will be more pronounced than in middle and lower ranges. Becau the bubble is not national in scope, there is no need for correction in many condary cities and towns. Average residential property prices in bubble areas might fall by 20–30 percent, which would be significant. For comparison, the average urban housing price drop in 2007–2008 when the government took measures to cool the property market, as explained above, was only about 3 percent.
Since the privatization of urban housing in China, loan/value ratios have typically been very low (about 34 percent on average for the period 2003–2009), but the latest reports indicate that the average loan/value ratio for newly purchad residential properties in eastern China incread to 66 percent in the first quarter of 2010. If there is a significant across-the-board property market correction in the near term, the government will probably try to limit the correction to about 30 percen
t, to avoid putting recent home buyers “under water,” as happened in the U.S. subprime mortgage market when housing prices began to fall in the cond half of 2006.10 There are no subprime mortgages in China, no ARMs and mortgage curitization is still in its infancy.
Industry sources suggest that property development companies are generally not over-leveraged. The share of equity in their total financing fluctuates between 20 and 30 percent, and prepayments (for which developers do not have to pay interest) likely account for an additional 20–35 percent. Moreover, China’s banking regulator (CBRC) recently required banks to make sure that developers have adequate capital of their own when obtaining bank financing for new projects.
There are no indications that the government will rely to any significant extent on interest rate policy in its efforts to control inflation and the property bubble. Small upward adjustments in the coming months may well be made, but reliance on administrative tools will probably continue to dominate. A fairly significant increa of real interest rates is needed to counter China’s tendency to over-invest, especially in manufacturing, to promote economic restructuring and to channel more income to the houhold ctor. On Monday June 21, the People’s Bank of China resumed a more flexible exchange rate policy, as had been announced the preceding Friday. It is likely, however, that China will make only small and very gradual adjustments. There are no publicly available statistics on mort
gage defaults in China, but化无
