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Ownership of home still a distant dream
By Sean Maguire |
January 28, 2010, Thursday
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Print Edition
Print Edition
EDITOR'S note:
Shanghai Party Secretary Yu Zhengsheng said on Tuesday that Shanghai should build houses mainly for those living and working in Shanghai, not for outside investors. He admitted there were bubbles in the city's land and housing prices last year, and promised to deal with them effectively. The following article partially explains why so much money has flooded into China's real estate market.
GLOBAL financial markets are anxiously scrutinizing China's seemingly ultra-resilient real estate sector, watching the market burgeon month on month, and hoping that they are not witnessing the growth of an unsustainable bubble.
On the residential side particularly, prices sagged in the global financial meltdown of 2008, but with the introduction of the stimulus package in early 2009 and the huge increase in bank lending in the first half of the year, real estate prices have soared.
While this may have been a good thing for developers and investors, the average Chinese urbanite has watched prices spiral way beyond their most optimistic of aspirations.
As the real estate bubble grows, ordinary Chinese people are feeling ever more distanced from the prospect of owning homes of their own.
Since 1998, real estate investment in China has accounted for more than 10 percent of the country's GDP, compared to around 4 percent in the US. This investment is inexorably linked to other sectors of the economy, such as construction and finance, and it provides employment for an army of migrant workers. Consequently, the real estate sector is seen as a central plank of the Chinese economy and accordingly enjoys favorable policy treatment from the government and state owned banks.
Until comparatively recently, Chinese money had few places to go other than low-yield savings accounts. The tremendous swings in the Chinese stock markets of 2006-08 left many Chinese investors wary of equities. Property values, on the other hand, have, with occasional and brief interruptions, risen consistently for decades and Chinese investors have come to see real estate as a hedge against inflation.
This strategy is further underpinned by the absence of a property tax in China, which means that the cost of carrying empty properties is relatively low. This is particularly evident at the top end of the market where huge numbers of homes are bought specifically as an investment vehicle, rather than as a place to live.
These off-market purchases distort the real market in that such properties are not priced against actual, organic demand for livable space.
The government has recently implemented a number of policies to take some of the steam out of this rush: introducing a property transaction tax, limits on speculative borrowing, such as raising the deposit requirements to purchase land to 50 percent and tightening the reserve requirement for commercial lenders.
A further measure has been to curtail the payment of commissions to real estate agents for introducing mortgage customers to curb unscrupulous lending practices, an overdue move in the light of the sub-prime fiasco in the US.
But will this be enough? A balance is required between maintaining sufficient liquidity within the economy to maintain growth while tightening credit so as to avoid a welter of bad debt and a possible market collapse.
Memories of the crash in the housing market in Japan in the 1990s are still fresh in the minds of policy makers. If the bubble were to pop, who would be the main victims?
The up-side is that the current exclusion of significant number of people from the market would mean that the suffering would not be as widespread as in the US.
The main worry is the impact that the popping of the real estate bubble would have on employment levels in areas of the economy that are dependent upon the property market. Nonetheless, a market correction would be a boon for those struggling to get onto the property ladder in Shanghai.
(The author is a counsel of AllBright Law Offices in Shanghai. The views are his own. His email: sbmaguire@allbrightlaw.com)
Shanghai Party Secretary Yu Zhengsheng said on Tuesday that Shanghai should build houses mainly for those living and working in Shanghai, not for outside investors. He admitted there were bubbles in the city's land and housing prices last year, and promised to deal with them effectively. The following article partially explains why so much money has flooded into China's real estate market.
GLOBAL financial markets are anxiously scrutinizing China's seemingly ultra-resilient real estate sector, watching the market burgeon month on month, and hoping that they are not witnessing the growth of an unsustainable bubble.
On the residential side particularly, prices sagged in the global financial meltdown of 2008, but with the introduction of the stimulus package in early 2009 and the huge increase in bank lending in the first half of the year, real estate prices have soared.
While this may have been a good thing for developers and investors, the average Chinese urbanite has watched prices spiral way beyond their most optimistic of aspirations.
As the real estate bubble grows, ordinary Chinese people are feeling ever more distanced from the prospect of owning homes of their own.
Since 1998, real estate investment in China has accounted for more than 10 percent of the country's GDP, compared to around 4 percent in the US. This investment is inexorably linked to other sectors of the economy, such as construction and finance, and it provides employment for an army of migrant workers. Consequently, the real estate sector is seen as a central plank of the Chinese economy and accordingly enjoys favorable policy treatment from the government and state owned banks.
Until comparatively recently, Chinese money had few places to go other than low-yield savings accounts. The tremendous swings in the Chinese stock markets of 2006-08 left many Chinese investors wary of equities. Property values, on the other hand, have, with occasional and brief interruptions, risen consistently for decades and Chinese investors have come to see real estate as a hedge against inflation.
This strategy is further underpinned by the absence of a property tax in China, which means that the cost of carrying empty properties is relatively low. This is particularly evident at the top end of the market where huge numbers of homes are bought specifically as an investment vehicle, rather than as a place to live.
These off-market purchases distort the real market in that such properties are not priced against actual, organic demand for livable space.
The government has recently implemented a number of policies to take some of the steam out of this rush: introducing a property transaction tax, limits on speculative borrowing, such as raising the deposit requirements to purchase land to 50 percent and tightening the reserve requirement for commercial lenders.
A further measure has been to curtail the payment of commissions to real estate agents for introducing mortgage customers to curb unscrupulous lending practices, an overdue move in the light of the sub-prime fiasco in the US.
But will this be enough? A balance is required between maintaining sufficient liquidity within the economy to maintain growth while tightening credit so as to avoid a welter of bad debt and a possible market collapse.
Memories of the crash in the housing market in Japan in the 1990s are still fresh in the minds of policy makers. If the bubble were to pop, who would be the main victims?
The up-side is that the current exclusion of significant number of people from the market would mean that the suffering would not be as widespread as in the US.
The main worry is the impact that the popping of the real estate bubble would have on employment levels in areas of the economy that are dependent upon the property market. Nonetheless, a market correction would be a boon for those struggling to get onto the property ladder in Shanghai.
(The author is a counsel of AllBright Law Offices in Shanghai. The views are his own. His email: sbmaguire@allbrightlaw.com)
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