Even while the developed economies go about resolving the crisis triggered by the collapse of their housing markets, there are signs that the disease of excessive speculation in real estate has moved to other regions of the world. One unlikely candidate to have become the location for periodic speculative booms in the housing market in particular is China, which since 2003 has been witnessing rather volatile movements in the annual point-to-point rates of change of property prices (see accompanying Chart). China has for about a year now been witnessing its third major spike in housing and property prices during this decade, forcing the government to step in with a host of measures to cool the market.
This is surprising since China began its drive to privatise housing only around 1998. In the immediate aftermath of that effort the annual point-to-point increase in property prices was higher than before, but not too volatile. But, more recently they have recorded periodic spikes and turned extremely volatile.
There are many indices that China’s official statistical agency puts out capturing changes in property prices of different kinds. One, capturing residential housing, had risen by close to 12 per cent during the previous 12 months, the government announced in April. Such announcements have been accompanied by policy measures that suggest that the government is quite concerned about the “overheating” of the housing market. In December last year the government strengthened an earlier sales tax on real estate transactions to reduce their number. Sales of secondhand apartments or houses within five (as opposed to the earlier two) years of their purchase were to attract a sales tax of 5.5 per cent. More recently, the State Council has reportedly approved a proposal to impose for the first time an annual property tax on some types of residential housing.
Another set of measures seeks to discourage borrowing to finance both first time purchases as well as speculative acquisitions of housing stock. Thus, the down payment for first homes bigger than 90 square metres was set at a minimum of 30 per cent. Those buying a second home had to outlay 50 per cent of its value, as compared with 40 per cent earlier. And mortgage rates have been increased. Implicit restrictions have also been imposed on the supply side with banks and finance companies required to adopt quantitative targets on the volume of their lending, including lending for housing purchases.
Among the many reasons why the government should be sensitive to sharp increases in property prices, two are particularly important. The first is that in the context of rising aspirations and growing inequalities, sharp increases in house prices in the eastern cities could result in disaffection among younger Chinese seeking to buy their first homes but finding that they have been priced out. House price inflation could endanger China’s successful mix of limited political democracy and near unlimited freedom to buy into the good things of life.
Second, a speculative bubble in the housing market could threaten the stability of China’s banking sector that is still being restructured to operate in an increasingly liberalised financial environment. This is because an important factor driving property price inflation and transforming it into an asset bubble is a boom in credit-financed housing and real estate investment. The state-controlled banking sector has always been a major expansionary instrument in the hands of the government. Chinese banks are reported to have provided new loans worth Rmb9,600 billionn in 2009, more than doubling the amount they lent in 2008, when they were asked by the government to supplement the economic stimulus programme adopted in the aftermath of the global crisis. Clearly, the assessment seems to be that a significant share of this additional lending went into the real estate and housing market, triggering a speculative boom that could damage banks if followed by a bust.
With the government having implicitly contributed to the boom, it is being forced to take on the responsibility of reining it in. Not surprisingly, responsible government spokespersons, such Liu Mingkang, chairman of the China Banking Regulatory Commission, have publicly cautioned banks about the risks they face and called upon them to curtail lending during 2010.
The government’s measures are reportedly having some effect. According to the consultancy firm Soufun, quoted by the Financial Times (May 26, 2010), sales of flats fell by 52 per cent in Beijing, by 64 per cent in Shanghai and by 79 per cent in Nanjing in the first two weeks of May compared with April. This in turn is expected to reduce construction and demand for intermediates like cement and copper, moderating increases in their prices. Partly fearing the effect that the government’s actions would have on growth and profitability, the stock market has started looking down. Finally, investors in China too are expressing fears about a possible “double-dip”.
Thus, despite its ostensibly distinctive “socialist market economy” and the trajectory it pursued in the immediate post-Second World War years, China has acquired characteristics and displays tendencies similar to the developed and “mature” economies. This is indeed a remarkable feature of the “age of finance”.