by Umar Farooq
China commodity markets are competing against an ever-expanding crop of the wealthy whose demand for real estate as an investment seems to know no bounds. China’s housing market is worth looking. It consumes nearly half of the world’s steel and cement production. It is a third of global GDP growth. Even those who dislike China shouldn’t wish for a housing crisis in China. Any trouble for Chinese home builders will have serious repercussions for the commodity markets worldwide.
“The Chinese housing bubble may mean big bucks for investors, but it’s also having a seriously negative impact on citizens, according to a prominent Chinese economist. Wu Xiaoqiu, an economist and vice president of Renmin University of China, told media at the Boao Forum in the province of Hainan last week that the current property bubble in China is disillusioning Chinese youth who can no longer afford to buy a home. “In a regular country, wealth should be concentrated in the financial markets, not fixed assets,” he said, adding that, beyond the risk of a collapse, the bubble means youth are being left behind, according to CNBC. “If young people lose hope, the economy will suffer, as housing is a necessity,” Wu said, responding to a People’s Bank of China survey, which found that 52.2 percent of urban households perceived housing prices to be unacceptably high.” therealdeal
Wu said he was hopeful the authorities would find a solution to constrain the froth in Chinese real estate, but admitted that repeated measures to curb speculation have so far only met with short-term success. Wu’s comments follow a People’s Bank of China survey published on Tuesday, which found that 52.2 percent of urban households perceived housing prices to be “unacceptably high” in the first quarter of the year, Reuters reported.
Let’s take the example of Chinese city Shanghai and its comparison with U.S. city New York. Shanghai is among a number of major Chinese cities running out of land. “Every year China investors are given the warning that Shanghai housing prices are out of control. They have been rising precipitously now for at least a decade, with an average 1,000 square foot apartment in Shanghai going for $725,000, or around five million yuan. Shanghai’s average salary per month is 7,108 yuan ($1,135) or 85,300 yuan a year. That puts local property in Shanghai at about 50 times median salaries in the city. Housing costs in Shanghai are unsustainable. Let’s compare that to New York, the most expensive city in the United States, where the median income is around $52,000 a year and an average 1,000 square foot apartment will cost $1.7 million based on square foot prices of $1,756. By that measure, housing prices in New York City are 32 times salaries of average New Yorkers.”
Chinese regulators have now decided introduce new lending restrictions in a bid to ease concerns over the mounting housing bubble in China’s largest cities. “On March 17, Beijing and three other major Chinese cities introduced a new round of lending curbs in an attempt to suppress the overheating property market in China’s largest cities. In the first two months of 2017, the total investment in real estate development was RMB985.4bn ($142.9bn), up 8.9 percent year-on-year. For the same period, sales of residential buildings were up 22.7 percent, according to official data. Price hikes are particularly pronounced in large cities where land for new developments is becoming increasingly scarce. For example, the Tier 1 cities of Beijing, Shanghai, Shenzhen and Guangzhou, have seen markedly greater price rises than those of other regions. In fact, estimates suggest it could take several years to work off existing housing inventories in some of China’s smaller cities.” worldfinance
To sum up the discussion, Chinese housing bubble will not burst in short term but will continue to expand. Short-term purchase restrictions have become increasingly ineffective in curbing the bubble, which requires more effort in supply-side reform, especially in the reforms of land, household registration system and property tax.
by Umar Farooq