Foreign Policy: China’s Bubble Trouble
Foreign Policy magazine had a good article Thursday on China’s bubbling property market, by Christina Larson. Christina and I met up when she was in Beijing last week, and had a long conversation on this subject. I was quoted a couple times in the piece, offering a diagnosis that already will be familiar to readers of this blog:
Economists say one significant driver of China’s soaring real estate prices has been wealthy investors in China snatching up property, because they have few other investment options . . . The answer, for many, has been to invest in one of the few options available to them — an asset whose value, within their lifetime, has only gone up and up: real estate. “Property is being held by many as a store of value, like gold,” explains Patrick Chovanec, a professor at Tsinghua University’s School of Economics and Management. “This bids up prices and also skews development toward high-end properties, as opposed to affordable housing.”
I also expressed my skepticism of the long-term effectiveness of some of the latest cooling measures that, admittedly, have sent jitters through the market:
True reform won’t be easy because it involves a painful re-examination of core aspects of the Chinese economic system, Chovanec argues: “The government is dealing in terms of edict, not root causes — but it’s not easy to just order water to stop flowing downhill.”
But even for those who have heard me say these things many times, the article is well worth reading for the anecdotes Christina offers that put flesh and bone on the theoretical arguments:
Ms. Wang, the wife of a successful Beijing businessman who gave only her surname, has purchased four homes in recent years. There’s the apartment she and her husband live in, and three others they hold as investments. All three are vacant; she’s making no attempt to rent them out. No property taxes are assessed in China, and so there’s no financial penalty for simply buying and holding. The rental market in Beijing, in comparison to the red-hot real estate market, is fairly weak, and besides, renting out those apartments — putting them to use and risking some wear and tear — could diminish their value. So they remain pristine and empty.
Near the conclusion of her article, Christina cites some disturbing and provocative quotes by Zhang Xin, one of China’s most prominent property developers. As she mentions, they come from an interview earlier this year, one that I highlighted in an earlier post and which is well worth checking out.
In my last post, I mentioned that I had had a spirited exchange on CCTV Dialogue this week on China’s property market, and promised to post a link once it was up. My counterpart argued that China is different, and cannot have a housing bubble because investors are paying cash. I pointed out that bubbles do not necessarily require leverage (borrowing) to form. Investment in real estate as a store of value, like gold, is a very persistent source of demand, but not a stable or healthy one. If you ever had to find end users for all the empty high-end apartments being held off the market for investment purposes, the market clearing price would be far below today’s prices. And while housing may not be highly leveraged in China, commercial real estate (offices and malls) is. Furthermore, the banking system as a whole has extensive exposure to property risk from its reliance on collateral-based lending.
The debate over real estate is just one small part of the program; the rest is devoted to concerns about inflation, how the Greek debt crisis may affect China, and whether the Chinese economy is at greater risk of overheating or sliding into a new slowdown. You can watch the entire discussion here, or by clicking on the photo.