China Radio International (CRI): Real Estate

Real estate prices have risen dramatically in recent years – especially in the major centers of Beijing and Shanghai. But is there an asset bubble forming? Today we’ll ask the experts.

  • Patrick Chovanec, Associate Professor at Tsinghua University
  • Wang Lina (汪利娜), Research Professor, Institute of Economics, Chinese Academy of Social Sciences
  • Yongheng Deng,Director, National University of Singapore

Summary of points discussed, as documented by Professor Chovanec.

The main driver of mounting housing prices in China isn’t short-term speculation (“flipping”) but longer-term stockpiling of empty apartments as a “store of value,” like gold.

  • If “flipping” were the main problem, we’d see a much more active secondary market. In fact, China’s secondary market is quite weak, suggesting that new housing is being stockpiled off-market and not being priced.
  • This phenomenon is partly due to a limited range of other investment options, and partly due to low holding costs, particularly the absence of an annual property holding tax. Other holding costs, such as maintenance fees, can often be minimized or avoided entirely.
  • Because it addresses the wrong problem, the government’s new tax on speculative “flipping” is unlikely to have much impact, and may actually make things worse by increasing the incentive to holder vacant property longer.
  • Local governments in China depend on land sales for as much as 40% of their revenue, so have a keen interest in keeping prices high — in effect, a kind of “hidden tax.” The point of an annual property holding tax is not to increase the overall tax burden, but replace this revenue stream with a more rational and sustainable structure that rewards productivity.
  • The so-called “affordability ratio” in China is sky-high. As a result, the unaffordable price of housing is already becoming a hot social issue in China. See: “Desperate Owners
  • Even though many people are spending cash to stockpile vacant apartments, there is plenty of hidden leverage in the market. The commercial real estate sector is highly leveraged, and most business loans in China have been issued based on high-priced real estate as collateral. The exposure is not the same as in the U.S., but is serious nonetheless.

Check out the complete interview (1st hour) online at: CRIenglish.com

Original post on Professor Chovanec’s blog.

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