China's House of Cards
Will a housing bubble upend China's economy? Or is the real problem a lack of housing? Part of an ongoing series of discussions with ChinaFile.
At this week's National People's Congress, outgoing Premier Wen Jiabao proclaimed that the government kept housing prices from rising too fast. Really? I wonder what my 28-year-old Shanghainese friend Robert thinks about that. He and his fiancée could never dream of buying an apartment on their own, but his fiancée won't marry him unless he has one. Robert is lucky: his parents are spending their life savings to buy them a tiny apartment. Residential property prices have climbed 50 percent during Wen's last five-year term, according to statistics bureau data, to the highest level since China privatized home ownership in 1998.
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The situation seems dangerously out of balance. In an interview with CBS's 60 Minutes last week, Wang Shi, CEO of Vanke, one of China's biggest property companies, said he thinks there is a property bubble, and that if the bubble bursts, there could be Arab Spring-like protests. When I saw my Shanghainese friend recently, he made the same point. In his experience, he said, young people are frustrated by rampant corruption, and many people can't find good jobs. "If the economy slows down, or housing prices drop," he said, "there could be serious unrest."
The government has to manage a delicate balancing act: on one hand, cool down the market, but on the other hand, avoid stoking public fury if prices sink. Real estate tycoon Wang said that apartment owners protested when he announced price reductions on some of his apartments. Will the government's new 70 percent required down payments on second homes and higher sales taxes help avoid a calamity? The stakes are high: Property investment now accounts for some 14 percent of the country's GDP, so if there is a serious collapse, I'm betting the ripple effects will be felt by Chinese, rich and poor -- and by us in the U.S.
I tend to think talk of a property bubble is simplistic. As I wrote in a DealBook column in The New York Times on Monday:
I do not mean to completely dismiss some of the dangerous imbalances that have been building in certain property markets across China. But China is not one real estate market, and taking a binary boom-or-bust view about the "China market" is likely a mistake.
The Financial Times examined the diverging markets last week, writing:
"China takes bifurcation to a new extreme. Not only are housing prices in the biggest cities moving in a different direction to those in smaller centers, there is also a glaring discrepancy in the amount of development being undertaken.The country's main metropolises -- Beijing, Shanghai and Shenzhen, which each have populations of more than 10 million -- suffer from chronic shortages of housing for low- to middle-income residents.
By contrast, scores of smaller cities with populations of up to 3 million face an increasingly severe oversupply.
This is why a simple description of China's housing market as a "bubble" misses the point. Does 'bubble' refer to the soaring prices in the biggest cities, where only the wealthy can afford homes? Or does it refer to the row upon row of empty apartment blocks in the smaller cities?"
One of the crucial questions, for which very smart people offer very different answers, is can bubbles burst in certain areas without bringing down the whole economy? Regardless of how that question is answered, we should perhaps give China's leaders some credit for acknowledging potential bubbles and taking steps to rein them in. What might have been different if American policy makers had recognized and tried to manage the risks of a housing bubble in 2005, 2006 or 2007?
A version of this post appears at ChinaFile, an Atlantic partner site.