Do speculators help or hinder a recovering real estate market?
- Hinder. (57%, 75 Votes)
- Help. (43%, 57 Votes)
Total Voters: 132
China’s 2010 policies to curb real estate speculation are likely triggering a housing slowdown in China, one that continues to decelerate today, suggest some economists. These policies include limiting multiple home purchases, requiring 30% – 50% downpayments, prohibiting home purchases by buyers who are new city residents (to discourage rural flight) and calling for banks to police the ban by refraining from lending to speculators.
The speculator ban was implemented to keep real estate prices enticingly low for end users, buyers who will occupy the home for the long-term as their residence. With investors restrained from the SFR market, it is argued more affordable housing will be available for occupants. Prices will not be driven up by third-party speculators who by design sandwich themselves between the seller and the end user solely for profit from the temporary position of holding title.
Critics suggest putting the muzzle on speculation has cut a crucial participant out of the market, with the unintended side effect of destabilizing the entire economy and pushing it into a freefall. By some estimates, home prices in China have sagged by at least 20% over the last year, with the construction industry similarly crawling to a halt.
Despite this, the Chinese government is sticking to its guns, threatening punishment for officials allowing speculators to purchase despite the federal rule.
In an effort to revive the housing industry the organic way, the government has lowered interest rates and allowed banks to lend more of their funds to buyer-occupants.
first tuesday take
China’s housing market is struggling with a lack of homebuyer demand (welcome to the club!), but would allowing speculators free reign fix it?
No! Speculators create phantom sales, conjuring the illusion of increased demand and a market that is doing better than it actually is. Thus, if you remove speculators from the equation, prices will immediately fall back to their rightful place. It’s a matter of financial gravity.
Artificial bubble economies are less preferable to more natural, stable markets – which is what China is attempting to find. The word is organic growth, without the interference of profiteers.
The U.S. government has taken the opposite approach, encouraging speculators to buy, buy, buy. For instance, the Federal Housing Administration (FHA) continues to enable speculator practice by temporarily allowing the buyers they help with insured mortgages to purchase homes from flippers.
Speculator flips absolutely inflate prices due to the illusion of market activity (artificial sales volume by twice) and drives competition for inventory (and thus increases prices), making it difficult for buyer-occupants to acquire and take homes off the market for good. This conduct prolongs the economic recovery even further. The FHA’s harmful pro-speculator waiver was extended earlier this year and is currently set to expire December 31, 2012.
The U.S. could learn something from China’s aversion to speculators. However, the amount of control the government has wrested over the Chinese housing market has gone too far, compensating with greater availability of cheaper mortgage money for user/occupant buyers.
Organic market movements must not be forcibly halted, though detrimental movements (such as the current inundation of speculators in the U.S.) certainly are not to be encouraged, as is the case in the U.S. The imaginary happy medium would include dropping FHA support for rampant speculation and instead directing efforts to promote end user purchases. That would help stabilize the real estate recovery and end this bumpy plateau of vacillating sales volume and pricing we now cope with.
A look on the bright side: speculators in China will be searching elsewhere for a safe place to park their cash, and the U.S. is currently, for better or worse, a speculator’s oasis with a passport for residency coupled to foreign speculation. [See first tuesday Real Estate Economics: Realty Almanac 2012, Chapter 20.1: Wealth from other nations; foreign investments in California real estate]
Re: Chinese Premier Urges Action to Spur Economy from the New York Times