China Radio: Real Estate Bubble?
Two days ago, on Christmas Eve, I was back with Chris Gelken on China Radio International talking about the hot topic of recent weeks, whether there’s a bubble in country’s real estate sector — and if so, what to do about it. We covered some good ground in an hour-long discussion, and I highly suggest that anyone who has been following my blog posts on the subject might want to listen in by clicking here (and selecting the first hour).
Some of the more important points discussed include:
- The main driver of mounting housing prices in China isn’t short-term speculation (“flipping”) but longer-term stockpiling of empty apartments as a “store of value,” like gold.
- If “flipping” were the main problem, we’d see a much more active secondary market. In fact, China’s secondary market is quite weak, suggesting that new housing is being stockpiled off-market and not being priced.
- This phenomenon is partly due to a limited range of other investment options, and partly due to low holding costs, particularly the absence of an annual property holding tax. Other holding costs, such as maintenance fees, can often be minimized or avoided entirely.
- Because it addresses the wrong problem, the government’s new tax on speculative “flipping” is unlikely to have much impact, and may actually make things worse by increasing the incentive to holder vacant property longer.
- Local governments in China depend on land sales for as much as 40% of their revenue, so have a keen interest in keeping prices high — in effect, a kind of “hidden tax.” The point of an annual property holding tax is not to increase the overall tax burden, but replace this revenue stream with a more rational and sustainable structure that rewards productivity.
- The so-called “affordability ratio” in China is sky-high. As a result, the unaffordable price of housing is already becoming a hot social issue in China (for more details, check out my earlier post here).
- Even though many people are spending cash to stockpile vacant apartments, there is plenty of hidden leverage in the market. The commercial real estate sector is highly leveraged, and most business loans in China have been issued based on high-priced real estate as collateral. The exposure is not the same as in the U.S., but is serious nonetheless.