The good news: Home prices are down only 3% over last year and there are four strong reasons why Chinese home prices won’t collapse:
- Most Chinese own their homes outright — they don’t have a mortgage. 80% of Chinese homeowners have no mortgage. So there won’t be any panic selling of homes; and there won’t be any foreclosure crisis regarding banks like it happened in the US during the 2008 mortgage crisis.
- No national real estate market. Home buyers a geographically limited to their hukou, or household registry are, which fragments the market into a thousand semi-independent markets. You must have a Shanghai hukou before you are eligible to buy a home there.
- New buyers will stop any downward trend. As prices go down, housing will attract new buyers. There are many young people who can’t afford homes right now. For them, houses will become more affordable if prices go down, say, 20%. There will also be speculators who will come back when the home prices start to drop. The government buys homes as they get cheaper. State-owned enterprises (SOE) are buying apartments and renting them out to low-income residents at rates below the market rate. Solve the real estate problem and help the poor at the same time! Win-win.
- Beijing has the tools. China has not had a single recession or a financial crisis in 40 years. because the Chinese system is very different from ours. Everyone gets together and coordinates their actions — central government, local governments, state-owned enterprises, banks, real estate developers, giant corporate conglomerates etc. all pitch in and work together. Consider the mortgage boycotts, which got a lot of attention in the Western social media. Well, Evergrande and other developers have now gotten special loans to restart the unfinished real estate projects within a month. And because it’s China, the government can also force these developers to finish the projects on time. One advantage of an authoritarian system! It could try decreasing mortgage rates, lowering down payments, setting price controls (“price should be at least so many Yuan per square foot”), subsidies for young and married couple to buy homes, and so on. Move people away from high-rise buildings to individual homes. It will stimulate the economy and make cities more appealing.There is no market ideology in China, so any pragmatic idea will be quickly adopted.
Conclusion: The real estate bubble in China is real. Prices in Tier 1 cities are astronomical. This is why the government pricked the bubble two years ago with new rules about debts for property developers. The first goal is to make housing more affordable; the bigger goal is a fundamental shift in China’s economy, reducing dependence on real estate and construction as tools to generate growth. Of course, this is a gradual process and cannot be done overnight. Over the next decade or so, China’s real estate sector will likely stagnate as the workforce population shrinks. But China’s leaders and people will not squander their great geopolitical opportunity just because of real estate problems. Read full article →