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Alarm Bells Ringing (Again) Over China's Housing Bubble

Despite the property bubble alarms, skyscrapers keep emerging in major cities in China. Photo from Chris CC: AT-NC-SA

Despite the property bubble alarms, skyscrapers keep emerging in major cities in China. Photo from Chris CC: AT-NC-SA

Continuously jumping home prices in the past year have raised concerns again about a real estate bubble in China as the government refrains from introducing any measures that would hinder economic growth.

New home prices in China's 70 major cities [zh] in December continuously rose from a year earlier, led by the large cities of Beijing, Shanghai, Shenzhen and Guangzhou going up 20.6 percent, 21.9 percent, 20.4 percent and 20.3 percent respectively, according to National Bureau of Statistics data. The sole exception was Wenzhou city from Zhejiang Province.

Alarms over China’s real estate bubble from experts and analysts at home and abroad have appeared time and time again during the past decade, but the bubble has yet to burst. Writing on popular microblogging site Sina Weibo, economist Zhao Xiao believed China’s housing market and economy would continue growing, but might result in a devastating side effect:

目前,海内外再度出现了许多谈论中国金融崩溃、楼市崩溃甚至经济崩溃的文章。这些文章都指出了很好的问题,但在近4万亿美元外储及城市化背景下,我相信中国经济仍将前行。真正要担心的是一种类似于"温水煮青蛙"的后果,杨小凯所讲的"后发劣势"加孙立平所讲的"社会溃败"在中国同时出现!

Much commentary from both domestic and overseas media outlets has talked about the collapse of China’s financial and real estate markets, with some even predicting the collapse of the economy. All of them have good arguments, but I believe the economy will still grow as China still has nearly four trillion US dollars reserved and the country is still going through urbanization. What really concerns me would be a “warm boiled frog” effect, the situation as described by economist Yang Xiaokai as the “curse to the latecomer” and the “social decay” scenario as mentioned by sociologist Sun Liping! 

Even though the bubble has not burst as the banks have enough money to support the economy, Zhao predicted that the hot property market will intensify social inequality (or “social decay”) because latercomers would have to pay for a property price that they could not afford. Popular online social critic “Rongjian2009” echoed Zhao Xiao's analysis and criticized the government for its lack of determination to change the economic structure:

我的估计,最后必定是饮鸩止渴,通过继续注入流动性以延缓经济的崩溃,当然,由此引发的恶性通货膨胀必定会制造一场更大规模的危机。这是“我们就是不改”的必然后果。

I expect [the government] would end up quenching a thirst with poison, delaying the collapse of the economy by pumping liquidity [by issuing more bank notes] into it. Certainly it would prompt a vicious inflation which could create a crisis on a larger scale, a simple effect of “we just don’t change”.

“Victor Liu Lei”, an investment expert, also highlighted the relationship between the oversupplied currency by China’s government and the jumping of asset prices:

自2006至今,中国的货币供应翻了三倍。货币潮水般地涌入,推动经济走向新高,也将资产价格推至高点。房价飙升,人们对泡沫的恐惧也不断增加。

China’s currency supply has tripled since 2006. The flood of currency has stimulated economic growth, as well as pushed asset prices to peak. Public fears about a bubble have increased with housing prices soaring.

Despite the alarms, policymakers are not keen to bring the market to a shuddering halt because real estate is a major driver of the economy, supporting some 40 other industries and generating about 16 percent of the country's 8.5 trillion US dollar GDP. Indeed, property is one of the best investment options, and local government revenues mainly depend on land sales. Zhao Xiao shared the latest economic data with his Weibo followers:

最新数据:2013年房地产业销售6.4 万亿元(猜猜地价多少);缴纳契税2874亿元;房产税1372亿元;营业税4051亿元;土地增值税2719亿元;缴税合计约1.1万亿元;银行房贷余额12万亿元;获8400亿元利息;土地收入28517亿元;政府和银行从房地产获利47917亿元;占6.4万亿元收入的75%。您还要再问明年房价会不会降吗?

Fresh data: sales revenue of real estate is 6.4 trillion yuan [approximately 1.06 trillion US dollars] (guess how much is the land price); deed taxes are 287.4 billion [approximately 47.5 billion US dollars]; real estate taxes 137.2 billion [approximately 22.68 billion dollars]; business operating taxes 405.1 billion [approximately 67 billion dollars]; increment tax on land value 271.9 billion [approximately 45 billion US dollars]; total tax amount about 1.1 trillion [1800 billion US dollars]; mortgage balance 12 trillion [1.98 trillion US dollars]; interest gains 840 billion [138.87 billion US dollars]; land revenues 2851.7 billion [471.45 billion US dollars]; government and banks gained 4791.7 billion [792.17 billion US dollars], accounting for three quarters of sales revenue. Do you still ask if housing prices will decline next year?

However, the over-dependence on the property market in the economy has resulted in a vicious cycle. In response to the news story that a factory owner with one thousand employees in Wenzhou made a million-yuan profit in a year while his wife earned 30 million yuan in property investment in eight years, Zhang Wenxue, a clerk working in Sina, sighed at the unjust economic game:

一个朋友哭诉,犹豫一年没买房,房价飙升,7年白干了。这是对勤奋劳动的巨大打击,也是不公平的。这么搞,谁还愿意做实业,都玩房地产游戏得了,早晚出事。

A friend of mine complained his seven-year work ended in vain due to housing prices soaring after he postponed to buy for a year, a big blow to diligent work and unfair. In such an environment, who will still do industry? People scramble for real estate and game markets. The economy will derail sooner or later.

While overseas media, such as Forbes, believe that the deteriorating living environment and air quality in Chinese cities will take a toll on China's skyrocketing home prices, many Chinese people think otherwise.

Polarized development

The polarized development of urban and rural regions has resulted in the concentration of resources like job opportunities, education, medical services, etc. Nearly all of the central state-owned entrepreneurs’ headquarters are located in the capital, and scores of key universities and hospitals are concentrated there, while some other provinces just have one.

However, it is extremely difficult for young people to settle in first-tier cities. Oriental Morning Post commentator “Tong Dahuan” predicted that in a year or so, the property prices in big cities would become absolutely unaffordable to the majority of young people:

一线城市将迅速告别30岁以下年轻人买房的时代,除非你爸是大官或大款,或者拆迁飞来横财。够得着的就抓紧吧,不出半年到一年,大部分年轻人将永远和一线城市独立产权房无缘。到时可别怪我没提醒你。

The times when young people under 30 could buy homes in the first-tier cities will be gone, except when your father is a big official or tycoon, or you could be compensated for home demolition. Hurry up and buy if you are able now. Most young people will miss the chance to own a private apartment within the first-tier cities forever.

“Hou Lei of Ever-bright bank”, on the other hand, pointed out that the fundamental solution to runaway housing prices is to address polarized development and redistribute resources:

新闻观察称去年北上广房价的上涨用了脱缰野马这个词。为什么政府各种组合拳出击勒不住这只马?我认为最根本原因是地域发展严重失衡。政府这几年采取的措施都是头疼医头脚疼医脚。只有从医疗教育等解决地域资源的平衡问题,才是解决问题的根本之道。

News Observers used “wild horse” to describe housing prices surging in Beijing, Shanghai and Guangzhou. Why have the various policies introduced by the government failed to curb the runaway horse? I think the most fundamental reason is the serious imbalance of regional development. Those policies carried out by government are superficial. The ultimate solution is to redistribute public resources, such as medical and education services [to less developed regions.]

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