China and its house price problem

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by Shaun Richards

This morning brought us up to date on an issue which has been concerning the Chinese authorities. It is the issue of inflation but not the more recent producer price one but the much more long-running issue of house prices. As 2021 has developed China has shown more signs of concern over this area and has moved to try to take some heat out of the situation. Or as CNBC reported last week.

The People’s Bank of China said in its first quarter monetary policy report that house prices must be kept stable, and emphasized that houses are for living, not speculation.

It must have been hard for them to write that as central bankers much prefer to concentrate on the wealth effects from higher house prices.

Reuters has crunched the numbers for us from the official spreadsheet.

New home prices in China rose at the fastest rate in eight months in April, according to data Monday, despite increased efforts by the government to tame the searing market and tackle an alarming rise in debt.

Average new home prices in 70 major cities rose 0.6% in April from the previous month, the fastest pace since August 2020 and up a notch from a 0.5% gain in March , according to Reuters calculations based on data released by the National Bureau of Statistics. .

Minds may well be focused in Beijing because it has the second fastest growth rate at 1.2% for the month and 10.1% for the year. Not everywhere grew as Mudanjiang saw a 0.1% fall leaving prices some 8.3 below last year but as a collective the position is below.

On an annual basis, new home prices hit an eight-month high of 4.8%, compared to a 4.6% increase in March.

Concerns over this have led to new measures.

This month, authorities in a dozen cities have stepped up their campaigns to drive speculators out of the property market, taking more targeted measures such as capping prices set by developers and preventing some real estate agencies from setting property prices. excessively high second-hand homes.

But if we look at the numbers the last couple of months suggest that things are picking up steam rather than slowing.

The Causes

Michael Pettis has pointed out that relatively property looks attractive.

With deposits at 0.35%, and government bonds yielding between 2.6-3.2% (1-year to 10-year), even low rental yields of roughly 2% make buying an apartment seem a good investment.

Looked at like that if you add in expected house price growth of even a few per cent per year then property looks good. Maybe as we have seen in the UK rent is to cover costs and the real game is hoped for price rises.

He then goes onto note not only the persistent nature of this but also the reason why macroprudential policies got abandoned in the past.

Beijing has been growling about surging real estate prices for years, and more than…ever recently, even threatening a real estate tax, but until regulators implement sharper-toothed measures — which of course if credible will almost certainly cause prices to fall — there is little they can do to prevent ever more speculation in Chinese real estate.

That is the issue with the so-called mactopru. It either does not work or it works so well it gets abandoned as authorities have no stomach for falling house prices.

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As the South China Morning Post pointed out yesterday taxes are another possible alternative.

China’s latest move to introduce a controversial property tax represents a fresh crackdown on property speculation and a curb on runaway home prices, but analysts believe it is also an “inevitable” solution to help solve the nation’s debt crisis and ensure financial stability.

A new scheme, like many Western countries, would eventually cover ordinary Chinese households. At the moment, taxes and fees are mainly collected only at land auctions, or in the property development or trading process, with few additional costs for residential homeowners.

The trouble is that such things can be the equivalent of just around the corner for many years and in fact this has been like that.

Local Government

This is another problem because these have come to rely on the house price boom for revenue.

Local authorities rely heavily on land sales revenues, which have nearly tripled in the past 10 years to 8.4 trillion yuan (US$1.3 trillion) in 2020.

Guiyang, the capital city of the Western province of Guizhou, said its net revenues incurred from land sales totalled 61.7 billion yuan (US$9.6 billion) last year, while its general budget revenues were only 39.8 billion yuan.  (SCMP)

Of course property tax revenues could replace that but the house price industry appears in other parts of the economy as well.

Real estate has been a pillar industry since home privatisation in 1998, and despite repeated efforts to lower the reliance, it still accounted for 26.8 per cent of the national fixed-asset investment last year. ( SCMP)

Today’s update suggests that the heat remains on.

the investment in real estate development grew by 21.6 percent year on year, an average two-year growth of 8.4 percent. The floor space of commercial buildings sold reached 503.05 million square meters, up by 48.1 percent year on year with the average two-year growth of 9.3 percent; and the total sales of commercial buildings were 5,360.9 billion yuan, up by 68.2 percent year on year with the average two-year growth of 17.0 percent.

Also there is the issue for the banks and indeed shadow banks.

Outstanding real estate related loans, including lending to developers and mortgages for individuals, hit a high of 50 trillion yuan (US$7.7 trillion) at the end of March, accounting for 28 per cent of total outstanding loans.  (SCMP)

Comment

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Many of these issues are familiar to us in the west and the commentary below from Think China actually seems to echo Japan.

In April 2018, renowned Chinese economist Fan Gang put forth the “six wallet theory” in response to a question from the audience in a CCTV2 TV programme (大讲堂). In a nutshell, according to this theory, if a typical couple wanted to buy a house, they would have to empty six wallets — that is, the kitties of their respective parents and grandparents besides their own. And this is just to pay for the down payment of the apartment!

So things were already too expensive before they rose further as we note “the bank of mum and dad” Chinese style which goes a generation further.

They go on to highlight an issue I have regularly made about the UK which is how the property market can crowd out other types of investment and hinder innovation.

But as I mentioned earlier, the down payment of an apartment can amount to millions of RMB. This amount of money could have been used to realise the entrepreneurial dreams of passionate youths instead.

The problem with acting to stop this is that China is trying to switch from production to consumption but the two-year numbers below tell us that is not going well.

In April, the total value added of the industrial enterprises above the designated size grew by 9.8 percent year on year, an average two-year growth of 6.8 percent………In April, the total retail sales of consumer goods reached 3,315.3 billion yuan, up by 17.7 percent year on year, an average two-year growth of 4.3 percent;

Pushing consumption higher often involves policies which also benefit house prices.

Next on the list comes demographics.

The average annual growth rate was 0.53% over the past 10 years, down from a rate of 0.57% between 2000 and 2010 – bringing the population to 1.41bn.

The results add pressure on Beijing to boost measures for couples to have more babies and avert a population decline.

The results were announced in a once-a-decade census, which was originally expected to be released in April.  (BBC)

Personally I think that is a good thing on quite a few grounds but it does come with implications.

China’s working-age population – which it defines as people aged between 16 and 59 – has also declined by 40 million as compared to the last census in 2010. ( BBC)

Can they solve all this? It will need to be unique as they are facing many of the problems of the western capitalist imperialists.

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