China’s home prices warming up, putting policymakers in dilemma18 July, 2012, 17:54. Posted by Zarathustra
Despite economic slowdown which was more severely than most thought, the real estate market, at least as far as home prices are concerned, remains curiously stable despite a few real estate developers going bust.
On one hand, the government still thinks that home prices remain high, while on the other hand, the government has been easing (even not quite willing to admit that sometimes). So despite tough words on continued home prices curbs, all those “fine-tuning” and interest rates cuts have successfully inject a bit of animal spirit into the market.
High frequency data of China’s real estate market has shown some signs of life, at least as far as transaction volumes are concerned after it became obvious that the Chinese government has started to reflate the economy. The so-called “fine-tuning” has been happening, and the central bank has cut rates twice within a relatively short period of time.
The latest monthly data from the National Bureau of Statistics (which is not that reliable) suggest that the national real estate market has bottomed, to say the least. The chart from Bloomberg Brief’sMichael McDonough shows that the real estate market has warmed up noticeably in June.
Source: Bloomberg Brief
Some probably believe that China has a great deal of control over the economy, meaning that it can ease parts of the economy while at the same time maintain a firm grip over the real estate market. We have never been a believer of such theory. And in fact, because of over-building in the real estate market, we are not completely convinced that the market has actually hit the true bottom (even it appears it has) if the government gives up tightening at this point.
That leaves some difficult choice for the policymakers in the short-term. Policymakers could be worried about easing too soon and too much at this point (even though we will not feel excited if China manages to stimulate growth, and here is why) as that could create fear about inflation and rising real estate prices, yet not easing soon enough will leave other parts of the economy struggle (not to mention that corrupt government officials have their wealth at least partly tied to the health of the real estate market, and lack of inflation is what they really fear).
We are not sure what is going through Chinese leaders’ heads at the moment, but it surely raises the question on whether the market has been too optimistic about the timing of the inevitable stimulus.