China’s Housing Bubble? No…
Blowing bubbles ...
I have several friends and correspondents in China, and some have recently commented on the presumed bubble in China’s housing sector. The nutshell summary is that these “insiders” don’t see a bubble. I don’t either, though many Wall Street gurus do. That’s not to say that China has no economic weaknesses. But, as usual, weakness is not likely to come from the “obvious” source.
The comments come from friends in China’s largest cities and from smaller places (at least by China’s standards), people who brave the traffic in Beijing and Shanghai – as well as country roads. Some are newcomers to China, while others are “old China hands” who have been there for decades. Some are even Chinese! In short, my sample – while unscientifc – covers a braod spectrum. Here’s what they’ve got to say.
As with most everything in China, you have to put the residential housing market in a political context. One of the things largely missed by Western analysts and media before Tiananmen Square in 1989 was that the prime mover for the protesters was the lack of decent residential housing. This was focused on the major cities, as the agricultural areas had not yet realized how much better housing could be. But people flocking to Beijing were dismayed at the hovels they had to live in. Beijing’s leaders realized this at the time, but underestimated the depth of feeling – a major miscalculation, the lessons of which have not been lost. They have been battling to increase the supply of housing ever since. This isn’t altruism or the American-style dream of everyone owning their own home. This is an attempt to the keep the lid on political fallout.
That is not to say that Beijing wants an unfettered housing market. Beijing doesn’t trust anything that is unfettered, and they do see the dangers of a potential housing bubble. Beijing is walking a fine line between bubble and stability, while growing the housing stock, and is doing a reasonably good job of it. This spring’s tightening seems to have cooled off the residential markets in the big cities. I’ve seen comments that sales dropped by 70% and that prices for housing in the major cities are down around 10% (I never entirely trust Chinese statistics, so take these as an order of magnitude only.)
What’s happening in smaller cities and in the countryside is less clear. There are reports that housing continues to boom beyond the big cities and that some of the city money (up to Y300 billion) is moving into the countryside, into precious metals, and into commercial or industrial real estate. Assuming overall demand has been dampened, however, still leaves Beijing with a huge problem, the problem they have faced for decades: the need to hugely increase the actual supply of housing. Demand won’t stay down for long, so growing supply is the only long-term method of avoiding future political disturbance – Beijing’s real aim.
Beijing has lately focused on the demand side by trying to control credit and by jawboning the market down. They now “recommend” that no one own more than two homes, one for your immediate family and another for your parents or children, in a valiant but belated effort to prevent speculative investment. Unfortunately for policymakers, China already has more than a taste for speculation and this toothpaste simply won’t go back in the tube. Too much money has already been made to stop it. Again, only an increase in the housing stock can cure this. And China hasn’t figured out how to do it. Maybe they should invite Western housing developers to compete! Don’t get your hopes up.
The bottom line is that residential housing is not a bubble. When prices resume their rise, and they will, the focus for Beijing must be on solving an extreme supply problem.
