Body
To understand the dynamics of the Chinese real estate market, it’s important to pay attention to the role of expectations. The danger with markets ruled by expectations is the speed at which they can change. China's rapid economic growth over the past decade has depended on high levels of investment, of which real estate investment is an important component. According to estimates by Nomura, if investment growth were to slow to zero, GDP growth would plummet to 3.7 percent.
China’s housing boom can be traced back to the emergence of financial repression in the early 2000s. Negative real interest rates on deposits, a closed capital account, a moribund stock market (post 2007), and a stunted corporate bond market have all worked to push household savings into real estate.
Putting money into housing seems like an obvious solution when presented with such dismal investment options. As more and more savers put their money into housing, prices began to rise more quickly. This attracted speculators who began buying multiple properties as investments, further increasing prices. This in turn attracted even more people to put their money into housing. Housing prices have risen so rapidly that the belief that housing prices can only continue to go up has become entrenched.
One can hardly blame people for thinking so. As the Financial Times points out, since 1998 housing prices have experienced almost uninterrupted increases. The housing correction that began to take hold in 2008 was never allowed to play out as the Chinese government increased the mortgage loan discount and cut down payments in an effort to combat the global financial crisis.
As a result, even when the government began putting heavy restrictions on the housing market last year, there was widespread belief that it was only a temporary setback and the housing market would spring back to life once restrictions were relaxed.
However, expectations in the housing market may now be facing a critical turning point. The prolonged application of housing restrictions combined with statements from Chinese leaders that there will be no relaxation of these policies in the near future are working to convince prospective buyers that the current house price correction is real and that steady price increases in the future are no longer a sure thing.
This brings us to the recently completed Central Economic Work Conference, the annual meeting where the Chinese government sets out its economic agenda for the coming year. The statement (Chinese language) released after the meeting contained somewhat mixed messages. Authorities promised proactive fiscal policy (积极的财政政策) and the continuation of moderately fast economic growth (经济平稳较快发展). At the same time the government reaffirmed its commitment to the current prudent (稳健) monetary policy which seeks to limit inflation and excessive credit growth. The statement also revealed that China’s leaders are nervous about the risks from a global slowdown and continue to see much of China's current growth as unbalanced, uncoordinated, and unsustainable
The notes of caution present throughout the statement indicate that China’s leaders are prepared to intervene in the case of any dramatic slowdown in growth, but it does not reveal any imminent policy changes for the housing market. The emphasis on fiscal policies, however, implies that even if growth measures are enacted, they may not be directed at propping up house prices. Some fiscal outlays, like the social housing program, may push prices even further down.
After two years of policies aimed at containing the housing bubble, expectations may finally be changing. What remains to be seen is if the current administration is willing tolerate to the economic “pain” long enough achieve its goal of eliminating the bubble mentality. Protests at sales offices and suffering property developers are one thing, but a painful slowdown in the construction and commodities markets, which are dependent on the property market, may be more than China’s leaders are willing to bear.