A large survey was taken late last summer, including 99,000 individuals (28,000 households) about their household finances. Among them, the vast majority of people have been putting their savings into their homes. There have been large down payments and soaring prices, and “even if housing prices halve, only 5 percent of homes would be worth less than the remaining balance on their mortgages, the survey found.”
Many households invest in their homes rather than securities, and because of this trend housing prices in the past decade have increased by twentyfold. In addition, this rise in housing prices is due to the connection of smaller cities and towns to larger cities by high-speed rail lines. If there is a dramatic fall in prices, the population of China will be furious. The government has been trying to slow the growth of housing prices by forcing banks to require 30 percent down payments for homes, and for any subsequent homes not allowing an individual to take out a mortgage. I wonder what effect the rising housing prices has had on the urbanization and migration of China.
I think requiring banks to receive a 30% down payment on homes is a good idea, and China should be very cautious about not fostering the same type of housing bubble that was so damaging in the US. China should pay close attention to any further inflation in housing prices and should certainly avoid the rampant securitization of junk mortgages that occurred in the US prior to our ’08 recession.
Since the Chinese economy doubles in size every 7-8 years, we would expect real estate prices to rise sharply. That’s accentuated because urban areas grow faster than China as a whole. So how can we judge whether prices are unreasonable?
One metric is to compare the cost of ownership to the cost of renting, because at some point the two should be close in magnitude. The investment story can work for a while, but as we know the factors that underlie rapid growth face diminishing returns, while urbanization must likewise slow.
In addition, returns on private savings should improve as the financial sector deepens [financial repression lessens], while cities must surely begin taxing real estate – it’s a comparatively efficient tax and also comparatively low in cost to administer. So in thinking about comparative returns, it is not sensible to project current below-inflation returns on bank accounts as continuing indefinitely, while costs of holding housing will rise with taxes and with the need to do maintenance as buildings age.
Are there other metrics that we might employ? How about our central business district model for the (local) geographic structure of prices?
It does make sense that the price of housing in China has been increasing as a result of its fast economic growth. However, at the same time, I am concerned that it may lead to the similar financial crisis caused by the housing bubble in the U.S. This will take a long time to occur though. With lots of moving into urban areas from rural areas, there is a high demand for houses, so I think the prices will likely to increase for awhile.