Real-estate prices in China’s top cities are spiking, generating contradictory predictions of either bursting bubbles or an economic turnaround. What is really going on in China’s property market?
The Chinese National Bureau of Statistics last week revealed that 10 of the 70 large and medium-size cities surveyed recorded annual price increases of more than 20 percent for newly built commercial housing. In the first-tier cities of Shanghai and Shenzhen, the gains were even higher: greater than 37 percent. In the second-tier cities of Xiamen and Hefei, the increases exceeded 40 percent.
Chris Watling of Longview Economics compared China’s property market today to the Dutch tulip mania that peaked in 1637. He pointed out that property prices in Shenzhen, in particular, jumped 76 percent since the start of last year, bringing the price of a typical home to US$800,000, just below the average home price in Silicon Valley. This might be a last hurrah before a market meltdown, he said.
Former vice minister of the Chinese State Council’s Development Reform Center Liu Shijin (劉世錦) disagrees, saying that after six years of reduced investment in infrastructure and construction, property market growth might be bottoming out, and liquidity and consumer confidence might be shifting back to housing.
First, it is important to recognize that not all cities’ property markets are surging in China. In 42 of the cities surveyed — those with industrial overcapacity and excessive property inventories — price increases amounted to less than 5 percent, with eight cities recording falling or stagnant property prices.
This pattern of divergence creates a dilemma for policymakers and investors, who should carefully weigh the insights of economic philosophers: John Maynard Keynes and Friedrich Hayek.
At a time of slowing economic growth, some are advocating Keynesian macro-stabilization measures, much as those used in China to sustain growth after the global economic crisis of 2008. However, in many areas, particularly in the northeast, central and west of China, the slowdown cannot be resolved through stimulus.
Stimulus in those regions is likely to flow out, along with the labor and capital that is moving toward coastal areas that boast more advanced technologies, innovation, superior infrastructure and a market-friendly business environment. Slower-growth regions need time to carry out supply-side structural reforms, including cutting inventories, reducing overcapacity and writing off the bad debts of local governments and state-owned enterprises.
The regions with surging property prices tend to be those that are drawing labor and capital with high growth and superior job opportunities.
A study by China Securities International showed that between 2000 and 2010, cities in eastern China received 82.4 percent of total migrant inflows.
In an attempt to manage the growth of cities facing huge land, housing and public infrastructure shortages, the government imposed restrictions on the demand and supply of housing, but, as the spike in housing prices in shows, their efforts did not work.
Chinese policymakers must have forgotten about Hayek, otherwise they would have expected that labor and capital markets would continue to drift toward growth and innovation in urban centers. They would also have recognized that market prices transmit complex, specific and changing local knowledge, which is not controlled by central planners. And they would have appreciated that if supply is to be matched with demand over time, real estate and infrastructure investments must reflect that.
Instead, policymakers inadvertently created bottlenecks in local land supply. Residential land transactions in first and second-tier Chinese cities remain thin and heavily influenced by urban planning policies, despite the depth and sophistication of residential property markets.
Fortunately, there is scope for China’s urban planners to relax restrictions on the supply of land and on the floor area ratio. A study by China International Capital Corp shows that the urban built-up area in Shanghai is only 16 percent, compared with 44 percent in Tokyo and 60 percent in New York City. Within that area, only 36 percent is used as residential zones in Shanghai, compared with 60 percent in Tokyo and 44 percent in New York City.
If the supply of land and usable floor area is not increased, more spending on local public infrastructure is likely to drive the cost of existing space even higher.
Liu’s observation that households are becoming increasingly confident in the housing market also seems to be correct. The recent increase in demand for housing might reflect people’s desire to hedge their savings against inflation or the desire to secure housing urgently, given the limited supply. Either way, Chinese seem convinced that investment in housing is a relatively safe bet.
If that is the case, the risk of a property bubble in China is probably being overstated. However, that does not mean that all is well in the property sector. If the government ignores market price signals, mismatches between supply and demand could build up, undermining growth in dynamic regions, while leaving low-growth regions weighed down by excess capacity and bad assets.
The good news is that there is still considerable room for policy maneuvers. The question is whether authorities will recognize and respond to those signals.
Andrew Sheng is distinguished fellow of the Asia Global Institute at the University of Hong Kong and a member of the UN Environment Programme Advisory Council on Sustainable Finance. Xiao Geng, director of the IFF Institute, is a professor at the University of Hong Kong and a fellow at its Asia Global Institute.
Copyright: Project Syndicate
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