Posted on Wednesday, October 27, 2010
By Geoff Dyer
Published: October 27 2010
If the Chinese economy were to suffer a nasty accident over the next few years, it is likely that housing will be at the bottom of it.
Given the underlying demand for housing, it might seem surprising even to entertain the prospect of a bubble developing. Every year, between 10m and 15m rural people migrate to cities – a pattern that is likely to be repeated for the next decade at least.
On top of that, there is huge potential demand from the existing urban population. Although some 70 per cent of city residents own their homes, a large chunk of those people still live in the former state-owned flats they were allowed to buy cheaply from the late 1990s. Many are eager to upgrade to one of the newer tower blocks springing up across the country.
Yet the Chinese housing market is at constant risk of spinning out of control. Apart from the negative real rates of interest they receive on bank deposits, ordinary Chinese have few other options available for investing their savings, other than a volatile stock market, because of the restrictions on taking money out of the country. That makes the perceived security of buying property a constant attraction.
For many economists, preventing this bias towards real estate investment from becoming a bubble is one of the main challenges for guaranteeing economic stability. “If China can prevent formation of an asset bubble, there is a good chance of sustaining economic growth in the future,” says Fan Gang, a former member of the central bank’s monetary policy committee and head of the National Economic Research Institute.
The added complication for the government is that house prices have become a sensitive political issue. While homeowners do not want to see the price of their main asset fall sharply, there is a generation of young professionals who see buying their own flat as a vital part of their life plan but who feel priced out of the market.
By some calculations, houses in Beijing and Shanghai are 15 times the average annual salary, double the ratio usually expected in a country of Chinese income levels. One of the most popular television programmes over the past year has been Snail House, a soap opera which showed the lengths that young Chinese will go to try to pay for their mortgages, with one character becoming the mistress of a government official in order to keep up with the payments. Indeed, the programme was so sensitive, it was taken off the air.
In recent years, the authorities have tried to use short-term administrative policies to try to control rising housing prices. In 2007 and again this year, measures were introduced to make speculative house-buying less attractive – this year the policies have included higher down payments for mortgages on second and third homes and increasing the mortgage rates for second homes.
However, there are limitations to using such administrative tools to control price increases. These types of policies have to implemented on a city-by-city basis and the risk is that once the initial campaign dies down, local governments – which often have close ties with the real estate industry – begin to relax their grip.
In recent weeks, there have been signs that this could be happening in some parts of the country. In Hangzhou, a prosperous city near Shanghai, a series of luxury apartment buildings have sold out in a matter of days – a sign that mortgages in some places might be getting easier to secure.
As a result, policymakers are developing two longer-term strategies to bring more stability to the market.
The first is a sharp increase in the construction of public housing. One of the ironies of the Chinese market is that although there is huge demand at the bottom end from migrants to cities, much of the construction is at the top-end, where the margins have tended to be larger.
Beijing has promised this year that local authorities will build 5.8m apartments for low-income families, many of which will be rented out. The government hopes to achieve twin goals with the public housing push: neutralise some of the political furore about the rising cost of housing, while providing a fillip to property construction, which will be hit by measures to limit speculative buying.
The other issue under discussion is the introduction of a property tax. One of the reasons that speculating on property is so attractive is that there is no annual tax that property-owners need to pay. As a result, the costs of buying an apartment and keeping it empty in hope that the market will rise are relatively low.
Introducing a property tax has other attractions, as it could help to create a more solid financial base for local governments. That would make them less dependent on continually selling plots of land to balance their budgets, which is sometimes land taken away from farmers.
However, introducing a property tax is politically tricky – in part because the government fears a backlash from homeowners if it caused prices to fall sharply. As a result, analysts predict the tax will be implemented very gradually, starting in one or two larger cities and, perhaps, focusing initially on second properties.
Beijing is hoping that these measures will help restrain the animal spirits in the housing market, without prompting a damaging bust.