Question: “Is there any country in history that has managed to grow its economy stably after a property bust?”
This is no philosophical inquiry. Over the course of the last two months, government officials have tried to turn China’s heated property market into something more equitable for middle-class home buyers. As a result, they have forced home prices down in at least 33 major cities.
I’m sure that his sounds eerily familiar to Americans, and now, to many Chinese homeowners, who now find themselves with negative equity. This crash is, in large part, a bureaucrats bet that the long-term health of the Chinese economy is best served by purposely tanking the real estate market now, rather than waiting for it to tank on its own. In October, Chinese radio, TV and print media began going on and on about how the property market is entering a winter season, all as real estate prices began to tumble. Are these macroeconomic adjustments here to help stabilize economic development, or are they actually trying to make property prices fall?
One could be excused for thinking the macroeconomic adjustments were to lower property prices, but the intention is unquestionably to help stabilize economic development and slow inflation. It’s a bold gamble by China’s leaders — and it suggests an almost unfathomable confidence that the Chinese economy can sustain a significant blow to its property sector, which accounts for 12 percent of GDP. This is quite the shift: Only months ago, newspaper writers, bloggers and microbloggers were questioning if China had a property bubble. Today, all Chinese economists are talking of breathtaking declines in property values as if they’re talking about the declining fortunes of the Chinese national soccer team….no particularly big deal. Wait, What?
HOW FAR IS TOO FAR TO FALL
Take, for example, the long Nov. 29 article, “Will Housing Prices Fall 40%? Predictions by Real Estate Industry Leaders and Public Officials,” in China Economic Weekly, one of the country’s oldest news weeklies (published by People’s Daily, the self-proclaimed Chinese Communist Party mouthpiece). The story featured industry and government experts’ predictions on just how far China’s residential real-estate market could fall.
In the article, a “senior official” with the Real Estate Association of China first predicted a modest 10 percent tumble for China’s major cities — Beijing, Shanghai, Guangzhou and Shenzhen — by the end of 2011. Other experts later offered predictions that housing prices would drop about 25 percent. But then Cao Jinhai, an economist with the Chinese Academy of Social Sciences, arrived to represent the “more than 40 percent” camp.
“Forty percent is just the average drop in the national housing price. If referring to first-tier cities, I think the average drop will be over 50 percent. Some specific buildings and regions may even fall more. The reason why it will fall so much is that the speculation and investment demand has jacked up the price so much. Therefore, the housing prices must drop by a huge margin due to the fact that the country is hitting investment and speculative demand.”
Anywhere else in the world, a government-mediated 40 percent decline in property values would not be spoken of with such a dispassionate tone. But on editorial pages across China, the tone is not only dispassionate, it is almost universally affirmative.
UBER-CONFIDENCE MAY BE MISPLACED
What’s so striking about editorials like these is the extreme confidence in the Chinese economy that underlies them, but there are plenty of reasons to believe that such confidence is warranted.
Not everyone in China is so sanguine. Many believe that the government’s policies will cause real damage to China’s economy and society in the short- and long-term.
Qiu Zhenhai, a commentator on Hong Kong-based Phoenix TV, a station with close ties to Beijing, tweeted on Sina Weibo:
The housing price problem has torn Chinese society into two pieces. One half is the homeowner group and the other is the non-owning group. The former not only wishes that the housing price will not drop, but also wishes it to rise steadily. The latter not only wishes the housing price will drop, but wishes that it drop sharply … The latter aren’t very influential, but they do have the energy to riot.
To the government’s dismay, new home owners, confronted with a sharp decline in the value of their properties, have taken to protesting against property developers who have adjusted prices downward. These protests show no signs of letting up. They may also have been one reason why, on Nov. 30, China’s central bank surprised many with a technical measure that should spur bank lending.
Observers are deeply concerned that Beijing’s continued market interventions will only exacerbate social tensions.
When the housing price dropped, those who didn’t own homes applauded while homeowners pounded the sales office with anger. So how can the house price represent the people’s interest? … A market economy is inherently a game for multiple interests, not some abstract, monolithic interest of the people.
As Chinese bureaucrats attempt to regulate a more equitable distribution of housing in China, this might be the important lesson yet to be learned…