PROPERTY is no exception to supply and demand. Social housing is for the poorest in society but for those who can afford it, a bought home is an asset which generally has the benefit of earning you money while you live in it. Property prices appreciate at the very least in line with inflation. But in desirable neighborhood hot spots in major capitals price appreciation can be stellar.
This is excellent news for construction companies selling new properties, for landlords who can charge top rents or for private owners who decide to cash in and move away.
But property price appreciation also has disastrous consequences for those on modest incomes who are perhaps trying to buy their first home or move to be closer to where they work. They simply cannot afford the inflated prices. And price rises at the top of the property ladder are generally mirrored all the way down to the bottom rung.
And the consequences of stratospheric property prices are economic as well as social. China has been through a mad building boom. Millions of Chinese wanted to buy modern homes. That wish became the more urgent as prices began to soar. Indeed many people began to buy on the basis not of the need for a home but as a speculation. If they could buy an apartment today, they could expect to sell it after a relatively short period of time for more, sometimes far more than they originally paid. As developers threw up ever more apartment blocks, they borrowed ever more heavily to fund their operations.
The Chinese government has long been aware of the dangers of the borrowing boom which was underwritten on the assumption that the value of the properties being built was only ever going to go up. In fact in some parts of China this stopped happening. Construction companies have been going bankrupt. The substantial bad debts they are leaving endanger the banking system. More seriously, government curbs on lending designed to dampen demand and slow rapidly rising property prices, created an unregulated non-banking credit market.
The parliament in Beijing vowed last week to make it a top priority to “contain excessive home prices in hot markets”. It remains to be seen if this can be managed. International analysts have long been leery of official statistics coming out of China. Given the dominant role of the state in industry and banking and the strong connections between the government and major private enterprises, it is perfectly possible that the numbers may not be completely accurate. An official running survey that covers 70 property prices in 70 cities shows that in January prices had risen more than 12 percent over 12 months. February’s figure was slightly lower. Anecdotal evidence suggests that the increases may be much higher, especially in the “hot spots” to which parliament referred.
The danger of a property price crash that would cripple the banking and mortgage industry is clearly exercising the government. Unfortunately past efforts to cool the property market have proved unsuccessful. Analysts are predicting financial disaster. But then for the last 30 years, the outside world has been warning that the massive credits that have helped fuel China’s spectacular growth were going to go sour and cripple the economy. And the outside world has been wrong.
