China’s government has stepped in to tame the fired-up dragon that is/was the Chinese real estate market. Real estate investments in China are now witnessing rapidly declining prices, and the country’s smart private money is looking elsewhere to invest excess funds.
Unlike in the U.S., where the government allows the free market to reign until catastrophe strikes, China’s communist-run government uses the state’s banking power to lean against and ultimately pop its real estate bubbles before they explode (which our Federal Reserve could just as easily do). To that end, the central government of China has placed restrictions on the purchase of more than one home, is requiring larger down payments and is reining-in speculators who are buying properties in bulk and flipping them as their value balloons, California-boom style. [For information on the effect of speculators on the California real estate bubble, see the December 2011 first tuesday article, Blame speculators for the intensity of the boom and bust.]
In addition to curtailing activity in the residential real estate market, the government has also limited developers’ access to bank lending and stanched previously unbridled credit flows to new trust companies.
As a result of Big Brother’s market intervention, price growth in China has begun to slow. In December 2011, home prices fell in 60 of the 100 cities studied by Standard Chartered. Land prices have come to a halt as well. The same study shows prices for undeveloped Chinese land were a third off their peak in 2010. [For a snapshot of current prices in California, see the December 2011 first tuesday market chart, California tiered home pricing.]
China’s government intervention has put the screws to many developers and Chinese real estate brokers who were embroiled in the seemingly unfettered capitalism of the 2010 Chinese real estate market. Now that lines of credit have been quashed and tight restrictions have been placed on deal-making, overleveraged players in China’s real estate market stand to lose their shirts while cash-rich companies (typically those of the government-affiliated variety) are expected to win big.
first tuesday take: This report could have been on Brazil. It wasn‘t about California. Of course, the bubble has yet to burst in Brazil and it burst a while ago in the Golden State. Now, it is China’s turn.
Although on a different continent and under very different market conditions (read: communism), the action in China is the same as it was here in the States not so long ago. Just as the California real estate market experienced in 2007, China’s real estate market is now populated by cash-poor, overleveraged developers sitting on uncompleted and unsold projects while government-connected investors (Wall Street in the American version) wait in the wings to exploit the overheated market.
So, China is suffering from a government-imposed real estate market collapse. So what?
In our global economy, this will mean a hit to U.S. gross domestic product (GDP) and thus a slowing of our economic recovery. In this case, bad real estate news for China means bad news for the U.S., although for different reasons and affecting different parts of our economy.
Regardless of where you fall on the income-gap debate in the United States, the concentration of wealth in the state’s hands that is bound to occur in China poses a threat to the U.S. recovery. China’s real estate boom was the first avenue towards a democratization of wealth in their country. Although unsustainable and mismanaged, it could easily be argued that the fortunes created in Chinese real estate over the past decade were a viable inroad to a more democratic Chinese economy — an economy that could both support and foster balanced trade with the U.S. as jobs flourished.
As China’s government clamps down on free and open real estate deals, they succeed in recentralizing the wealth created by their real estate market that would inevitably spill over into other forms of domestic commerce, something they need to work on to equalize their foreign trade markets. However, they are merely reaffirming their state power and re-energizing their ability to control the currency market in order to maintain a trade imbalance with the U.S. that decidedly swings in China’s favor for the moment. Of course that will change, as it always must.
first tuesday will continue to keep a watchful eye on these developments in the Chinese real estate market. Although it seems a world away, these global market shifts are now the realm of local California brokers and agents. [For more information on the globalization of real estate, see the November 2011 first tuesday article, Wealth from other nations: foreign investments in California real estate and the January 2012 first tuesday article, High-tier real estate’s foothold in California.]
re: “China’s housing downturn will benefit state-owned developers” from the Economist