From the discussion held in the class and the article: http://www.ft.com/cms/s/0/a3c20b6a-ca74-11de-a3a3-00144feabdc0.html?ftcamp=rss&nclick_check=1
I have major concern that :
Real estate has become the critical problem of China economy. The entity economy has not modernized yet, while the whole economy has got involved in the asset bubble.
The rocket-rising housing price and the decreasing tax from the entity have made the local government more and more rely on the land finance. For example, land revenue of Beijing accounts for the one-third of local financial revenue, which means that if the stream of the land revenue is cut off, the local fiscal revenue will shrink dramatically. What’s worse, more and more cities are replicating the path of Beijing. Therefore, it is common that whatever the local government says to control the housing market, the consumers usually ignore the spam comment.
And the crazy phenomenon happened in the real estate market indicates that while the purchasing power of rmb is decreasing within China, the keen in the real estate market will not retreat. The soaring financing product prices and the difficult environment for the entity economy make more an more people leave far away from investing in the entities. And what they did will lead to a vicious circle: leaving the entities, rushing into the capital market, blowing the bubble, bubble burst, issuing more currency and then blowing the bubble again–the declining entity economy just ruined the foundation of the capital market.
The rising housing price is far beyond the real wealth of the economy and the trillions of real estate cannot be cashed, if so, the bubble will burst quickly. In fact, the real estate is very fragile; the local finance is just like relying on an iceberg. The data of Guangzhou, August showed that 20 out of 27 prime lots in 2007 have not started construction yet, 1 prime lot is abandoned and 6 are almost denied.
Real estate is exactly the crux of problems in China economy, combined with huge moral pressure, public pressure and market pressure–If the all-time-high housing price keeps going up, What China economy will pay is not only the cost of bubble burst, but also the cost of reconstruction of the whole economy.
Jiayin
Jiayin,
I think that you’re correct that escalating real estate prices drives the risk for a bubble in the Chinese economy. It makes sense that China is cautious about capital convertion policies and closely watches the inflow of capital. Can you please elaborate on the following sentence?:
“Real estate has become the critical problem of China economy. The entity economy has not modernized yet, while the whole economy has got involved in the asset bubble.”
I am curious to know what you mean more specifically.
Thanks! /Erik
Yes – the surging price would drive the risk for a bubble in the Chinese economy. The soaring price that is out of reach for average Chinese would hurt the consumption – which is contradictory to what China’s policymakers want. The more money the families has to save for housing, the less disposable cash to buy consumer goods.
However, how do we define Bubble? By the housing price and average income? Or considering the “true demand” it was discussed earlier weeks, should we define the bubble by occupancy rate?
Winston
Sunny Choi
The configuration and implementation of property taxes, payable seasonally or annually based on a certain percentage of the market value with differential rates on luxurious and modest housings (such as 3% and 1% respectively), would serve to spread out the timing of tax collections from only the initial procurement to all periods of possession. This would not only even out the income stream of a hierarchy of governmental levels to all future periods of property possession but also to some extent discourage the frontloading of land auctions as tax income would be spread out to succeeding cabinets. Also, faced with augmented opportunity costs of procurement, the appetite of speculators would somehow assuage which would translate into mitigation of property prices, though the elasticity of property prices over a percentage change in property tax remains to be quantified.
(Ref.: http://news.xinhuanet.com/english/2009-11/06/content_12398149.htm. Keyword: property tax)
Annual property tax + some incentive for putting the apartments for rent would help develop the rental market into a standardized market. This will reduce the need to purchase a house to live.
Winston’s concern is quite of importance. Unless we have a definition before we start to discuss, we will reach no agreement of sensible and reasonable.
How to find a sensible definition? Firstly, let’s consider why we are interested in such a housing price issue? Yes, that is because it’s critical to the whole economy and social welfare, as the bubble burst will seriously depress the economy. That is it. In my oppinion, I would rather choose the one which can explain the possibility and destructive power of the bubble burst. For example, the housing-price-income ratio can explain how difficult it is for a true potential consumer to afford a house, or precisely, maintain the high price. This is a indicator from aspect of true demand. Similarly, the ratio of PE of real estate to that of stock, is also useful. Because they are similar investment goods, the ratio should be at a reasonable level, otherwise, it is indicated that there will not be enough investment demand for real estate to maintain the high price, for stock is a better alternative at that moment. This is an indicator form aspect of investment demand.
Moreover, to think of how destructive it is, we can think of how large is the ratio of real estate loan to the whole asset of the banks, which can indicate how large the bad debt might be going to be if the buble burst. ect.
Karthik from Unclemilton:
Jiayin: Could you please explain what you mean by ‘entity’ in your article.
Thanks.
chenhui from hkac
I think the entity he mentioned is the real economy, opposite to fictitious economy. Former means the real and tangible production and circulation of material and spiritual products, as well as services. While the latter may refer to the circulation of capital, including stock market, real estate, banking system and so on.
chenhui from hkac
We have talked in previous classes that by the international standard, PE ratio, there seems really a bubble in china’s real estate. However, if we specify the problem, I think it is not as severe as we thought.
Firstly, why can it maintain? With the urbanization, 9 million farmers influx into cities every year, not mention the requirement of independence of young people. Since we can loan from banks, the high price is still supported by the demand.
Secondly, as Dike mentioned, the ratio of housing cost and income is important. In fact, due to the underestimation of income (reported by CRF), the actual ratio of shanghai residents is 35%, which considered reasonable. There is also 40% low income people in SH, however, they are not the mainstream of housing purchasing.
Thirdly, we ignore the fact that as international cities, Beijing and Shanghai attracts more out comers, with high income and fame. It is not surprising to present high price for housing.
Also, because of the land revenue (as Jiayin said) and the 1/4 proportion in total fix-asset investment the real estate takes, there is no reason for government to burst the “bubble”.
Erik:
A few comments:
1) I agree with Sunny on the property tax as an effective way to “smooth” a potential bubble. I am not a proponent of high income taxes (rather the opposite) but find property taxes quite an efficient way ensure income for the governemnt while at the same time cooling off the RE market. There are drawbacks, such as unfairly taxing old people that happened to buy the RE many years prior and now becoming punished for a hot market. Furthermore, I am TOTALLY against taxing inheritance of RE, but that’s a totally different story…:)
2) I am not sure that I agree with Chenhui that urbanization would help sustain unreasonably high RE prices. Remember that many who move from the countryside are poor and nowhere close to be able to buy a house in the city of Shanghai or Beijing.
If people with low income move to the cities we would by definition have a bubble as the housing price vs income ratio would effectively increase (if we go by this metric). Just a teaser…..
Sorry for my confusing argument. Maybe the influx of farmers I mean is just the evidence for long-term and potential demand and mainly focus on the ordinary cities, not Beijing and Shanghai, so it is not the explanation for high price of the two cities. But similarly, I guess, the two cities attracts elites around the nation and worldwide (just like the cities attracts farmers), while their demand can explain, to some extent, the high price in the two frontier cities.
chenhui
Jundong from SunnyBear,
Hi, Chenhui, maybe our samples are different. To my knowledge, for most famers who are now working in cities (like our city of Xi’an), they would like to settle their houses in their hometowns or small towns (such small towns can also be unbanized) around cities after they earn enough money in cities, rather than buy a house in cities, given the huge cost of living and house itself. In this regard, I am not sure whether famers can serve as the potential demand.
Jundong from SunnyBear,
I venture to come up with my point that the house price in the real estate market should stay at this high level right now, for a slight decrease in house price will result to turbulence both for the whole economy that relies on real estate industry heavily as Jiayin wrote and individual household who views their houses as sound investment. In order to discuss conveniently, the urban house demand is classified into three groups: people for survival, people for life and investors for profit. As a Chinese saying goes, if everyone who is in real need of house can get a house to live in, then the country will stay at peace. For those who are in real need but powerless to afford such an expensive house, the government should do its best to accommodate them by constructing economically affordable houses and low-rent housing system. For those who pursue and afford high-quality life, they are willing to pay such a high price to enjoy favorable surroundings and convenient conditions. For those who want to earn profit by owning a house, they should follow the rules of housing market and investment. Among the three groups, the first one weighs the dominant weights and the second one counts only a small part. The existence of the third group results basically from the fact that government hasn’t solved successfully the problem of the first group. In this regard, the root of housing problem lies in the economical supplies by government, rather than the soaring price by developers.
I agree with the argument that discussing about financial market and real estate investment. Perhaps we can still remember the Hong Kong’s real estate bubbles. Speculation with hot money caused a “real increase” in housing prices of 50% from 1995 to 1997, followed by a “real decrease” of 57% from 1997 to 2002. In the booming period, people are too optimistic and keep purchasing the bull market’s stocks, which increased real estate’s price, pushing more people to buy financial products with the purpose of affording the high-price housings. This dramic increase of price level is not supported by increase of real purchasing power, and the bubble was broken when people calm down and rethink the real values of those properties.
Therefore, China government should keep eyes on the price of housing market and properly control outside investment, avoiding possible speculation which may also give appreciation pressure on RMB.
More stories on HK housing bubbles: http://knowledge.wharton.upenn.edu/article.cfm?articleid=1194
Previous comment: Fangming from HKAC
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China stepped into the real estate bubble?
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