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CCTV: Price Targets for Real Estate

March 29, 2011

This morning I was on CCTV News BizAsia talking about China’s real estate market, in particular the targets cities across China have been asked to set on property price increases this year.  Shanghai has pledged to keep real estate prices from rising faster than the target GDP growth rate (8%), while other cities are targeting price rises of 10-15%.  You can watch the interview in a short clip here.  I discuss whether the benchmarks that are being used make sense (they don’t) and whether the targets will have much of a market impact (they won’t).

To be blunt, I see these pricing targets as something of a sideshow.  First of all, does anyone truly believe that there is a single city in China that actually wants to rein in the real estate boom?   Land sales are a critical source of local government revenue, and continued construction is vital to hitting their GDP targets.  Clearly they don’t want to rein it in, which is reflected in the rather generous pricing targets (Can anyone actually imagine property prices going down?  Apparently not.) 

Second, supposing price controls were actually enforced, they would do nothing to change the market distortions that cause so much money to flow into real estate, and unproductive real estate in particular.  The solution to that is either (a) rein in the money supply that is inundating the market with cash, or (b) give people somewhere else to put the cash besides real estate (over the long term by developing domestic capital markets, but immediately by opening up the capital account to allow Chinese to invest overseas).  These are steps that can only be taken at the national level, and only by taking on deeply entrenched local interests that have no desire to see this party come to an end anytime soon.

7 Comments leave one →
  1. charlie permalink
    March 29, 2011 10:36 pm

    I really wonder what would happen if we banned private americans from investing overseas.

    • Peter permalink
      March 30, 2011 9:47 pm

      As opposed to “public” Americans?

      Are you implying that the price rises in China’s cities are the result of private capital flows from the US?

      If so, I suggest you do a bit more homework on where FDI is flowing (and what portion of supposedly “foreign” capital begins on the mainland).

      • Peter permalink
        March 31, 2011 12:23 am

        My comment above is in reference to Charlie’s comment, not your (Chovanec) blog post.

  2. March 30, 2011 9:12 am

    I’m glad I wasn’t the only one who thought the price targets were laughable. Gov’t officials rely on GDP performance for promotions, and pointless real estate projects are the easiest way to meet those targets.

  3. deetee permalink
    March 30, 2011 10:59 am

    First, how does that magic target number come up ?
    Investing overseas is good idea, but it will end up mostly
    in foreign real estate; foreign government do check origin
    of fund, which will weed out those thru incapable of
    proving its source–sometimes unwilling, prompting
    many rich Chinese think twice.
    However, Hongkong real estate market is buoyant and
    prosperous from endless Chinese RMB.

  4. Peter permalink
    March 30, 2011 9:58 pm

    Your analysis (as always) is spot on. What fixed asset price target works in a meaningful way over the long term? Very few, if any.

    The additional difficulties of the housing market being the result of other systemic issues in China’s domestic economy only increases the likelihood that the real estate targets will be meaningless.

    Further, what is the practical means of enforcing such a price target? Would developers be denied credit / land / permits? All of them? Some? In one area? How defined? What makes up the basket of properties used in the calculation? Who decides which properties are representative of the market or not?

    I don’t have faith that a transparent price index system could be constructed even in an ideal world, and there appears to be no mechanism by which its enforcement wouldn’t be draconian or arbitrary (or both) in the real world.

  5. Karen permalink
    April 1, 2011 6:56 am

    Are there any indications the Chinese are considering a revamp of their local revenue sources to diversify away from the selling of land?

    Selling land is obviously not a sustainable business model for a local government with a finite supply of land to sell. It’s definitely a pro-development incentive structure, which is good at the outset of a push to develop an underdeveloped economy, but at some point it starts to do more harm than good, right?

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