China Real Estate: How The Official Price Targets Become A Joke1 April, 2011, 3:31. Posted by Zarathustra
Tags: Property, Real Estate
Earlier this year, the China central government announced 8 new measures to regulate the real estate market. One of the measures asked local governments to set the price targets for home prices for 2011 by the end of the first quarter.
So here you have them, the price targets.
While the public would rather have the real estate prices falling, all but one cities actually thought that they should target a rising home prices (the only city which mentioned the word “drop” was Beijing, which target at a price level which is, well, stable with slight drop. So after all even Beijing is not really hoping to see a drop).
Many of the local governments link the home prices growth target with GDP growth or disposable income growth, so basically they are still hoping for a rising home prices. Some other cities have some absurd price targets. For instance, Guiyang government targets the real estate prices growth to be “in-line to with national average”, which doesn’t say anything. The most ridiculous one is Yushu, Jilin. The government targets at the growth rate for 2011 not higher than that of 2010. Here’s the catch: newly constructed home prices in 2010 rose… well… 50.5%. Basically, all cities allow real estate prices to rise, and the targets are roughly 10% on average.
Why do these local governments want real estate prices to rise? Because of the increasing role of real estate in their economies. In particular, the public finances. Previously I have pointed out that even the central government in Beijing seems to be quite strong financially, the public finances of the local governments painted a very different picture, and not to mention the 1.8 trillion debt by the crooked railroad industry (see point 3). Local governments have been increasingly relying on land revenue to fund themselves, so a thriving real estate market is a life-support system for them. So the central government wants to see home prices to fall, but not the local governments, because that will bury the governments.
But the bottom-line is this: the price targets will not work, and whether they want prices to rise or fall is irrelevant. First off, price targets are not very much different from a price control, if strictly implemented. Thus real estate developers will be less interested in building stuff if price targets are strictly implemented as that will imply that they cannot make as much profits, so they may end up building less, decreasing supply as opposed to increasing it (as the government would hope). But that is still a secondary reason why it is not hitting the problem.
The real estate bubbles were caused by the rapid expansion of money supply and credits. The only way to deflate the bubbles is to tighten monetary policy even more aggressively. Of course, the Chinese government and the People’s Bank of China has been making some good progress on that front, in my view, as many of the China’s enterprises have to borrow money from Hong Kong instead. This was not enough, but once it is enough, home prices will drop even the panicky local government officials want them to rise instead.
If you are interested, do check out the first real estate bubble of communist China in 1990s (yes, the current bubble isn’t the first one) and how it burst.
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