housing market

[Outofin]

I vaguely knew that the ever rising house price is a hot topic and a major concern of urban residents. But it is irrelevant to me, so I didn't really pay any attention. Now I'm buying a new house (in the US), out of curiosity, I've been reading about Chinese housing market. The issue turns out to be very captivating to me.

My first reaction was, the high price is totally nonsense. But, what will happen? I don't know.

There are many reasons that the Chinese housing market at the current stage is different than any other markets, so it probably won't collapse like others. But on the other hand, doesn't it sound familiar that "we're seeing a whole new economy. And this one is different than any others we saw before and doesn't comply to old rules." It often means a diaster, doesn't it?

Simply out of curiosity, I'd like to watch how it turns out. I understand the anger and confusion of those who want to buy apartments to live. They have more practical question: what to do?

[gerri]

Same here. Well, with the fascination, anyways.

The thing is, in China it seems to be part and parcel of economic policy:

- Local governments get great revenue from selling land to developers (often enough, from something I read somewhere - ahem - even state-owned developers, effectively selling land to themselves...)

- Rich people, unless they have ways of getting their money out of the country, largely don't have any other investment opportunities that offer value and high returns (well, stocks, but still)

- Anybody (male) who wants to marry needs to buy an apartment - or so the stereotype goes (I wonder how true it really is, but it has been drawn upon to explain why Chinese households save so much)

As a foreigner, especially, I must say that the prices are more than ridiculous. And especially given that the land is leased to the developer by the government, meaning that at the latest after those 75 years, you don't know if the place would still be yours (or your children's). If you buy something used, the 75 years still apply to the first development, so it might even hurt you yourself...

To me, much of it sounds like there should be a switch to rental property, maybe even supported by the government. However, people (like in many places) wouldn't take good enough care of those, etc., etc. and so on...

But buying? At those prices? When you probably will have to chase after work somewhere else? ... It truly is fascinating (but as you can tell, this post is very stream-of-consciousness ;-) )

[gato]

Shanghai prices are more ridiculious than anywhere else, because it is seen as a safe investment. The apartment I used to rent has almost doubled in price in three years, much of it since the huge government last year. The rent has actually gone down a little since three years ago. Many apartments are bought for investment and are sitting empty, because it is not worth the trouble to the owners to rent out.

[Outofin]

Because there is no property tax, it makes a lot of sense to buy a house (if you can), rent it out, and wait for appreciation.

I guess the system wasn't sophisticated enough to have property tax some years ago. And all of a sudden, people have poured so much money on houses, the government no longer dare to introduce property tax.

[trevelyan]

I think the market in Beijing is starting to ebb after the push it got from the government stimulus package (n.b. handout) last year. We rent and while our landlord wants to sell (and keeps jacking up the price) he isn't getting any offers. Meanwhile, the price of rent for comparable places is falling or holding constant.

[Outofin]

Among the 3 most influential real estate developers (the other 2 are 王石 and 潘石屹), 任志强 is *always* bullish about the housing market. His advice is consistent and persistent: no matter what, buy, buy buy! Now with new regulations under way, he's feeling a bit...fidgety?

http://blog.sina.com.cn/s/blog_4679d3510100imps.html

[Outofin]

Now I'm getting conflicting information and even more confused.

In Chinese media, there isn't a clear sign whether the price will go up or down. Most believe the central government isn't serious, or isn't capable, in controlling the housing price. They don't see results.

In foreign media, it's mainly a topic whether the bubble will burst. Andy Xie (somehow I just have some unreasonable trust on his judgment) is changing his tone.

Chinese Real-Estate Bust Is Morphing Into a Slow Leak

I simply don't see where the view change comes from. If you look at the macro result he predicts, it's not bad. Actually, it's really good.

[gato]

In foreign media, it's mainly a topic whether the bubble will burst. Andy Xie (somehow I just have some unreasonable trust on his judgment) is changing his tone.

Chinese Real-Estate Bust Is Morphing Into a Slow Leak

Andy Xie might fall under the category of Western-educated Chinese media (MIT Econ PhD). His analysis makes sense.

[jbradfor]

In Chinese media, there isn't a clear sign whether the price will go up or down.

To some extent, in any market in which the price is determined by what someone will pay for something, this is always the case. If everyone "knew" that prices are going down, then in the absence of artificial / exterior forces to the contrary, they will go down. Because who would buy at the current levels if everyone "knew" prices were going down?

[Housing, however, is to some extent a different market than, say, a stock market, because people need a place to live. However, since people have the choice between buying and renting, if everyone "knows" prices are going down, more and more people will rent instead and drive prices down.]

[gato]

[Housing, however, is to some extent a different market than, say, a stock market, because people need a place to live.

In a previous article, Andy Xie estimated that there is a 25-30% vacancy rate in China. Many people are buying apartments for investment but are not renting them out because the market-rate rent is too low. They feel they can make more on the price appreciation and the work involved with renting is not worth the trouble.

I can believe it for Shanghai because a large percentage of apartments in many buildings are dark at night.

http://www.marketwatch.com/story/chinas-overhang-of-empty-apartments-2010-08-03?pagenumber=2

Aug. 3, 2010, 8:30 p.m. EDT

Fear empty flats in China's property bubble

Although the government doesn't publish vacancy data, I think the vacancy rate for the nation's private, commercial housing stock is between 25% and 30%. That's at least double what's required in a normal market. The gap between what's needed and what's available can be viewed as speculative inventory. The value of this inventory held by speculators is probably around 15% of GDP. It's being kept on ice, just as copper and other commodities are hoarded in anticipation of rising prices.

[jbradfor]

Wow. That is amazing stupid (IMHO) and somewhat scary.

A standard measure for whether a housing market is too expensive is what is the selling price of houses relative to the rental prices. To high a ratio, and it is considered too expensive.

To buy unit in a market that is also so oversold that it's not worth renting, hoping it will appreciate further, is really risky.

Sure, some will make some money, assuming the market doesn't crash tomorrow. But most people? At least, as I understand it, most people pay with all or mostly cash, mortgages is less common, so at least the banks won't get insolvent due to this, but people will lose a lot of savings.

[Outofin]

It's a faith-based system. People believe that the government won't allow the market crash. Chances are, they're right.

House is a special commodity in its own category. There are many factors. Speculation factor, wife factor...

[jbradfor]

How will the government stop the market from going down? Implement price controls? Buy up the excess inventory of houses? Allow enough new residents into Shanghai to use up the excessive units and subsidize their rent?

[Outofin]

I think it's through supply-and-demand. Hong Kong has been maintaining unreasonable high price for more than a decade.

The best way to make people have houses without hurting existing home owners is to let it cool down gradually and slowly.

[gougou]

So you're saying prices derived through supply-and-demand are unreasonable? What, in your opinion, would be reasonable prices then?

[Guest realmayo]

Wow. That is amazing stupid (IMHO) and somewhat scary.

That may be so but it's not more stupid than, say, buying shares in a company which pay no dividend but whose price has been rising for ages. It seems to me that price bubbles are not unusual, they're perfectly normal (though I'm not saying they're desirable -- lots of people tend to lose money, obviously).

Also bear in mind that the empty appartments are, literally, empty: because they will have been bought new they would have no electric wiring, bathroom, painted walls and so on (at least, this is what I read a while ago), so I reckon there would be a big up-front cost before getting the place ready to rent, which skews any calculations about cost versus monthly rent.

[roddy]

How will the government stop the market from going down? Implement price controls? Buy up the excess inventory of houses? Allow enough new residents into Shanghai to use up the excessive units and subsidize their rent?

I honestly think it'll do whatever it has to. It's hard to imagine a scenario that brings about widespread urban discontent nowadays, but a housing market crash seems to me to be one of the more likely possibilities. The Party's legitimacy is now based on increasing affluence, and a huge of amount of affluence is tied up in property.

I suspect housing prices have been a matter of concern in a number of protests - Xiamen PX, the incinerator in Guangzhou, the maglev in Shanghai.

[gato]

Land supply anywhere is highly controlled by the government and is fully to open to market forces.

There is a book called "Land and the Ruling Class in Hong Kong" about Hong Kong government's (elite's) policy of restricting land supply and high land prices. I have a copy of the book. The author, Alice Poon, worked many years in senior positions at Sun Hung Kai and Kerry Properties, two of the largest developers in Hong Kong. See below for more.

Hong Kong has very low income tax (15% flat tax on earned income, no tax on capital gains, dividends or interest) and no sales tax. The government is mainly funded by revenue from land, both in the initial land auction and the subsequent property tax. Therefore the incentive to keep land prices high.

Many accuse the mainland government of doing the same thing.

http://biglychee.com/Hemlock/mus-goodstadt-poon.html

What’s Wrong With HK Today, and Why It Will Change Only Over the Dead Bodies of the Civil Service and the Property Tycoons

http://www.asiasentinel.com/index.php?option=com_content&task=view&id=2628&Itemid=224

Land and the Ruling Class in Hong Kong

Written by Alice Poon (潘慧嫻)

Monday, 09 August 2010

On July 2 the Chinese edition of "Land and the Ruling Class in Hong Kong" by Alice Poon, a regular contributor and blogger for Asia Sentinel, was launched by Enrich Publishing and Hong Kong Economic Journal to considerable success. In 2007, the book was selected by Canadian Book Review Annual as "Editor's Choice" under the "Scholarly" category. The Chinese edition, titled "地產霸權" is enjoying brisk sales and widespread positive reception. The fourth print run of the Chinese-language edition in little more than a month is being sold in most Hong Kong bookstores. We are pleased to present an excerpt from the English-language edition:

"Conglomerates under the control of the (the oligarchic families) have a stranglehold on some of Hong Kong's economic arteries, namely property, utilities, public bus service and food retail. The rise to power of these economic lords owes a lot to a government that adopts a laissez-faire approach where it so suits the economic powerhouses and at the same time actively protects their interests.

In general, these groups have all been fattened on owning land – the single most valuable natural resource in Hong Kong. Their unrivalled prosperity is in part a byproduct of the 50 hectare-a-year land supply ceiling imposed on the Hong Kong British government by the Sino-British Joint Declaration signed in 1984, which caused property prices to skyrocket during the 1985-1997 period. This special factor apart, the groups have always had government on their side, whether under British or Chinese sovereignty, as government itself, being the sole supplier of land in Hong Kong, has a vested interest in the property sector through the receipt of revenue from land sales. This has led some academics to criticize the collusive relationship between government and the developers.

[Outofin]

So you're saying prices derived through supply-and-demand are unreasonable? What, in your opinion, would be reasonable prices then?

Well, I guess it depends on the perspective. True, in a free market, whatever price is reasonable in some sense. When I say it's unreasonable, I mean the price is so high that the general public can't afford it.

And, it's not a free market. Hong Kong maintains their housing price by limiting house supply. It's artificial. (Ops, obviously gato was writing at the same time. So see above for more info.)

Even if it was a purely free market, price can be distorted. In stage one, people's income increase rapidly that they can buy houses. Building houses isn't like making TVs. It takes much longer time. Supplies can't meet demands. The result is high price. It triggers anticipation of higher price, and then speculation.

[Guest realmayo]

So you're saying prices derived through supply-and-demand are unreasonable?

I think that's fair enough: people behave irrationally, unreasonably, so naturally their human-like behaviour leads to unreasonable/irrational prices. Eg the hackneyed "fat tails".