Today the New York Times published a Reuters article about the current housing situation in China and what the Chinese government may do in the face of what appears to be a massive housing bubble. I’ve described much of the situation in previous posts, but here is a brief recap of what has occurred:
The price of Chinese housing relative to the average person’s income has skyrocketed, especially in major cities (a typical home in Beijing goes for 22 times average annual income), additionally, prices in major cities have escalated 25-50 percent over the last year. Many Chinese have engaged in speculative investment in housing, often on credit (for an excellent look into the Chinese lending system, check out this post from Mish on Global Economic Trend Analysis…crazy stuff). Speculation was/is fueled by exponential growth in the housing market as well as the relative paucity of investment opportunities in China. Besides the lack of other investment vehicles, the situation is somewhat reminiscent of the situation in the United States during the housing bubble years of the mid-00s.
Now we have the Chinese Prime Minister Wen Jiabao calling for price stability, saying, “it is the key responsibility of all levels of government to stabilize housing prices and to guarantee availability of housing”. He also added that “The housing issue is not only an economic problem, but also an issue of people’s livelihood that affects social stability”.
Chinese banking authorities have taken steps to cool the housing market, including tightening credit and raising down payment requirements. They have also mandated stress tests for all banks to determine what effect a 60 percent decline in housing values would have on the banking system.
The second statement about social stability is particularly telling. Millions of Chinese citizens have invested vast sums of money into housing under the assumption that it will continue to increase the way it has. Large market corrections could wipe out huge amounts of home equity, destroying the life savings of many. This situation creates the potential for unrest amongst the Chinese populace, which must be a cause for concern in Chinese authorities.
From a recent article in Financeasia.com, we have the following prediction about the market:
“The third quarter will see a significant price correction in the residential property market. We expect the downward price adjustments in the second half will be 20% to 30% in tier-one cities, 10% to 20% in the tier-two cities,” wrote Standard Chartered economists Stephen Green and Jinny Yan in a report.
I cannot accurately predict how this issue will play out. I believe that the Chinese housing bubble is bound to burst eventually. However, the situation is not totally analogous to the pre-bubble U.S. because of the fundamental difference in the Chinese and U.S. economies and systems of government. Chinese authorities also seem more aware of and determined to deflate this bubble than U.S. authorities were.
Do you have any thoughts or insight on the situation in China? Am I wrong or missing something here? Let me know you opinion in the comments section below.
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Dan
September 13, 2010 @ 2:02 pm
I think the bubble is way more complex than the Chinese government can handle. It is much different than the US’s. The Chinese government has invested itself far too heavily in their economy. This bubble extends not only to home prices, but retail, infrastructure, and office space. The Chinese government may be aware, but so far their efforts haven’t put a dent into stopping the problem. Of course just focusing on the residential sector prices they have already reached Japanese 1980s levels, relative to China’s GPD. It’s crazy and not at all sustainable. This is Dubai like growth on steroids.
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Dan
September 13, 2010 @ 2:03 pm
I think the bubble is way more complex than the Chinese government can handle. It is much different than the US’s. The Chinese government has invested itself far too heavily in their economy. This bubble extends not only to home prices, but retail, infrastructure, and office space. The Chinese government may be aware, but so far their efforts haven’t put a dent into stopping the problem. Of course just focusing on the residential sector prices they have already reached Japanese 1980s levels, relative to China’s GDP. It’s crazy and not at all sustainable. This is Dubai like growth on steroids.
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Michael Kraus Reply:
September 13th, 2010 at 2:51 pm
Dan you could be correct. I do not know what type of policy tools the Chinese government has available in such a situation. I do suspect their powers are far broader than those the U.S. government has.
I am of the firm belief that this bubble will cause a worldwide shockwave if it isn’t dealt with adequately.
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