Ma Jun, chief economist at the People’s Bank of China’s research bureau, warned about the unsustainability of valuations in the real estate market and the potential fallout from the bubble. ‘Measures should be taken to put a brake on the excessive bubble expansion in the property sector, and we should curb excessive financing into the real estate sector’, Ma says. The central bank’s paper, Financial News, suggests that surging property prices in first-tier and some second-tier cities are the result of inefficient regulation by local governments, and that local governments should effectively control local property markets to prevent bubbles.
Rising property prices, despite the risks, have nonetheless given the economy a boost that’s helped China keep growing, by weaknesses in exports and other areas. Gross domestic product has risen 6.7 per cent over the year as of the third quarter, according to the official data released last Wednesday, meeting market estimates and dampening expectations that there’ll be any further stimulus on top of record low interest rates over the past year.
Construction has been chasing property prices, and with the booming financial sector, holding national product up in the face of weak industrial production. The hope is that manufacturing production is bottoming out and that the property sector can be wound back.
Chinese property prices are no longer just the concern of the young, desperate to secure a home, especially in China’s largest cities. The gyrations of China’s housing market are now of global significance. Investors or speculators, more than ordinary households, shape trends in property markets in cities like Shanghai, Beijing and Guangzhou, and the ripple effects of the psychology in these markets spread far and wide — to London, Vancouver, Sydney and around the world.
The property sector’s impact on investment and consumption (including the household goods that fill new apartments and housing estates to bursting point) is estimated to account for about one-quarter of Chinese GDP. That’s why this year’s recovery in the housing market after the last slump has brought some good news along with growing anxieties for officials. It has helped steady GDP growth at 6.7 per cent, faster than most predicted. It has stabilised demand for raw materials like iron ore and copper, easing the pressure on commodity prices. And it has brought a surge of Chinese investment across global real estate markets.
Yet the next major economic crisis could originate in China. Its economy is a major part of, and is enmeshed in, the global economy via industrial production, commodities trade, finance and real estate investment, among other things. Though it is almost impossible to tell where the next economic crisis will come from, it would not be surprising if it were from a shock in one of these increasingly important markets, given the unprecedented transformation that China is attempting to effect.
The stock market ups and downs are what has grabbed headlines, but these are largely unrelated to the real Chinese economy, both during the wild upswings and the busts. The property market, however, is deeply tied to China’s real economy. And the property bubble is real and large.
In our lead essay this week, Hu Shuli, editor and founder of Caixin Media, explains that by some measures, property prices in China are already higher than they were in Japan during the asset bubble at the end of the 1980s and are approaching those in the United States just before its subprime collapse.
At the height of Japan’s asset bubble, the land on which the imperial palace stood in the middle of Tokyo was valued at more than all of California. The bursting of that asset bubble in 1990 and the difficulty in effecting a quick recovery led to the now lost two and a half decades of growth. The advanced economies have not yet recovered from the global financial crisis that was triggered by the loans that fuelled the US property market boom in advance of the subprime crisis.
Hu explains that ‘[t]he main driving force behind China’s rising home prices is reliance on land sales to fill local government coffers. About half of the money generated from land sales now goes to local governments, which currently account for over half of their fiscal revenues. This poses a dilemma for many local governments, who now have an incentive to keep property prices artificially high’. This market, she concludes, is in urgent need of reform, alongside other parts of China’s economy. The Chinese government needs to cut local government reliance on land sales for revenue.
While there is a lot of irrational exuberance in the Chinese real estate market — Hu points out, for example, that divorces have spiked in Shanghai to take advantage of a regulatory loophole that favoured financing first homes — it’s not yet clear that the real estate market will unravel. While there’s a huge squeeze on property in the top four or five cities, the market has risen by only half as much in the next 30 cities, and hardly at all in the rest, where the population is shrinking.
The sanguine call it a problem of imbalance rather than a bubble. Even in Shanghai, there’s a lot of land that could be released to take the pressure off the real estate market. But selling more land in the big cities would hurt important players and choke off a key source of local government revenue.
There are certainly serious problems in the Chinese real estate market and, as Hu says, there is an urgent need to deal with them.
The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel, Amy King and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.