Whack-A-Mole in China’s Bubbly Housing Market

By Nigel Chalk

(Version in 中文)

 It has gone out of fashion now but, not so long ago, there was a popular fairground attraction called Whack-A-Mole. Rascally moles would pop their cute little heads out of holes in the ground and your task was to use a giant rubber mallet to wallop the poor critters back from where they came. China’s bubbly housing market makes me think that this game could be ready for a comeback.

There’s a lot of talk these days of a bubble in China’s property market. Certainly there’s no shortage of super-sharp investors and analysts that have very strong (and very diverse) views—see what  James Chanos, Andy Rothman, and Nouriel Roubini have to say.

The China team at the IMF is regularly asked about this. The question crops up in many different guises: Is China’s property sector going to crash? What about all those empty apartments that have no one living in them? Have you seen the remarkable and pristine ghost towns in Ordos? Isn’t all this going to end badly?

The various viewpoints certainly shift as one travels from the familiar cities of Beijing and Shanghai to witness the construction fever in the “smaller” megalopolises of China. Assessing the situation is not helped by the variety of different data sources that portend to tell the story of China’s real estate sector. In addition, vocal commentators complicate, rather than clarify, the situation by drawing on a palette of colorful anecdotes to paint a picture for the economy as a whole.

In all of this, there is one thing about which everyone agrees. A healthy property sector in China is essential for a healthy economy. Property occupies a central part of the economy with tentacles that link into both upstream and downstream sectors. Steel, cement, glass, furniture, refrigerators and automobiles are all reliant on housing.

The fortunes of Chinese real estate cannot be ignored.

So, then, what is our story on Chinese real estate? It is certainly true that China, perhaps more than anywhere, finds itself managing a potent cocktail of ingredients that fundamentally fuel property price inflation.

  • Domestic savings are high and, in large part, held captive by a comprehensive system of capital controls that prevents Chinese households and companies from diversifying internationally.
  • Yet, opportunities for investing those savings domestically are limited—the bulk of savings are held as bank deposits, earning interest that is well below the rate of inflation.
  • It’s cheap to buy property and hold it, waiting for the capital gains to accrue—there’s no property tax, no capital gains tax, and the real cost of financing home purchases is still very low.
  • Finally, housing demand in China is underpinned by some powerful drivers, including rapidly rising living standards and an ongoing process of urbanization that will persist for years to come.

All of these forces have led the real estate market in some of China’s largest cities to look decidedly bubbly.

The government has confronted these forces with a menu of measures. Such measures include limits on speculation and restrictions on purchases by non-owner occupiers, and the financial system is being protected through curbs on leverage and limits on loan-to-value ratios. These are all having a tangible effect, dampening prices and bringing down the volume of ‘frothy’ transactions while still sustaining a healthy pace of private investment and construction. It also seems that the government is getting better at calibrating these measures, in part through ongoing learning-and-doing.

Nevertheless, all of these efforts are still only treating the symptom of the problem—the pace at which house prices are going up—but the underlying impetus remains in place. Ultimately, the solution has to involve higher interest rates (on both deposits and loans), efforts to create a broader set of financial assets for the population to invest in, and a broad-based property tax that covers the majority of China’s housing stock. None of this will be politically easy and it will all take time. However, only this kind of deep-rooted change will create the environment where households view their apartments as shelter rather than as a (literal) concrete store of value.

Until then, policymakers will continue to have to periodically step back into the property market with successively tighter administrative controls, continuing to play Whack-a-Mole with China’s burgeoning property bubble.

18 Responses

  1. Over the past few years, housing prices have been keeping a very high position in China and prices continue to rise. Maybe you do not believe the fact that some developers of new housing can increase the price of their homes but this is what is happening now in China

  2. Over the past few years, the housing has been keeping its high price stance in China and the price is still on the rise. Probably you might not believe the fact that some new housing developers could increase their house price daily by RMB 4,000 per square meter. This is what is happening now in China.

  3. [...] That’s not to say there’s no inflation problem. Demand pressures in China manifest themselves in two very different ways. The first is through asset price inflation, notably property prices. The economy does well and house prices shoot up. Policymakers then have to step in with administrative measures to restrain the bubble. (I wrote about this recently.) [...]

  4. [...] That’s not to say there’s no inflation problem. Demand pressures in China manifest themselves in two very different ways. The first is through asset price inflation, notably property prices. The economy does well and house prices shoot up. Policymakers then have to step in with administrative measures to restrain the bubble. (I wrote about this recently.) [...]

  5. [...] View the original here: Whack-A-Mole in China's Bubbly Housing Market « iMFdirect – The … [...]

  6. [...] IMF Mission Chief for China Nigel Chalk recently pointed out, China continues to play “whack-a-mole” with the property market. The government tries [...]

  7. [...] Whack-A-Mole in China's Bubbly Housing Market iMFdirect The .Aug 9, 2011 China's bubbly housing market makes me think that this game could be ready for a comeback. [...]

  8. The most important – a new chinese housing rapid technology
    ( check: http://housing.interconsulting-group.com ), which provide a low cost house-building system and the cost of house 200-300 USD per sq.m. It is great.

  9. [...] is rapidly becoming conventional (or at least accepted) wisdom.  I was pleased to read an IMF blog post by the organization’s resident China expert, Nigel Chalk, on what he now calls “China’s [...]

  10. “Another reason for the high demand for housing is the skewed sex ratio among the young. More competition for women, leads parents of men to buy bigger and bigger houses as wedding presents.”

    In China, it’s considered shameful/lunacy to get married without a house. That’s the traditional view. However, more and more young people now are marrying and renting. The price of property in big cities like Shanghai and Beijing is simply astonomical, making it impossible for many new couples to own a home. The pressure on housing prices isn’t really coming from poor young couples (who can scarcely borrow money from the bank to pay for a new home, let alone frivolously push up the price), but from the speculative housing market. When considering such a situation, I have to ask: where is this money coming from? Have you any idea what Chinese salaries are like?

    In China, buying/investing in a home is one of the ONLY safe ways to preserve wealth. Even a home is not really owned by you, but ‘borrowed’ from the Government. You do not own it forever, but rather, for a 20-30 year period, at the end of such time, you either sell the house or risk it being ‘revalued’ by the Government, or lost. As such, enterprising Chinese believe true wealth lies in FLIPPING houses (Carlton sheets style), rather than owning several of them. This is what pushes up the price. Homes in China are rapidly being flipped, over and over and over, as the unitary store of value. There is ZERO security in the Chinese stock market (famously corrupt, without any unbiased oversight group, or transparent financial data).

  11. [...] is rapidly becoming conventional (or at least accepted) wisdom.  I was pleased to read an IMF blog post by the organization’s resident China expert, Nigel Chalk, on what he now calls [...]

  12. [...] in a post on the IMF’s blog, China mission chief Nigel Chalk appears unimpressed with Beijing’s year-long fight to control [...]

  13. [...] in a post on the IMF’s blog, China mission chief Nigel Chalk appears unimpressed with Beijing’s year-long fight to control [...]

  14. [...] Whack-A-Mole in China's Bubbly Housing Market iMFdirect The .Aug 9, 2011 China's bubbly housing market makes me think that this game could be ready for a comeback. [...]

  15. [...] in a post on the IMF’s blog, China mission chief Nigel Chalk appears unimpressed with Beijing’s year-long [...]

  16. Another reason for the high demand for housing is the skewed sex ratio among the young. More competition for women, leads parents of men to buy bigger and bigger houses as wedding presents.

    http://www.nber.org/papers/w15093

  17. [...] – Whack-A-Mole in China’s housing market. [...]

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