Chinese Property Market Bubble: The Problem In Reverse26 October, 2011, 2:14. Posted by Zarathustra
Tags: Government policy, Real Estate
Financial Times ran the story on Chinese property developer Vanke warned that prices and volume will fall. And that, of course, will have serious consequence to the economy, both domestically and globally, if hard landing happen, which is still judged to be likely here.
But let’s put that aside for a second. The recent price cuts in various cities have triggered some protests by homeowners who have bought their properties some time ago, finding themselves now losing money as prices fall. One can consider the social aspect of this kind of behaviours, and imagine that if prices fell even more, there could be a problem. But I will leave that to people who are more interested in the social harmony aspect of the story.
Bullish arguments or the “muddle-through” camp (which is basically also in the bullish camp) now would probably argue that because the social impact of falling prices are also undesirable, so together with the fact that large price corrections could be disastrous for the economy, bullish argument goes that policymakers would not allow significant correction to happen. And once more, I am taking issue with that.
The question I am asking is: why would you still think that policymakers can handle that? Bulls did not really think that policymakers could really cool the property market (because there are many people in China, blah blah blah), and in fact policymakers have tried and failed for the best part of the past 2 years or so until very recently (which is largely down the the credit tightening more than anything else, in my view), confirming their views that government cooling measures aren’t working (at least until recently). Now the bullish camp thinks that policymakers cannot allow prices to fall more than 10%, and policymakers have the ability to stop real estate prices from falling too much. That’s wonderful as the expectation is totally asymmetric: prices cooling measures never work, and prices supporting measures will definitely work. Hello? The Chinese government has failed to cool property prices and inflation for almost 2 years, and people don’t talk about that as a failure of government’s intervention. Amazingly though, bulls think that government have the power on the other side of the game. Why?
The experience in Hong Kong has shown that in a uptrend, government measures to cool prices have very little impact on the trend, until the trend really changed. Similarly, in a bear market, property market support measures could not stop prices from falling. One can also point to the current situation in the US housing market, which is only stabilising now after peaking about 5 years ago despite having massive fiscal and monetary stimulus.
As I have said many times before, the ideal things that the Chinese government might be interested to achieve is a mixture of incompatible goals. Striking the right balance is infinitely harder than striking the wrong balance. Curiously though, there are still many people who think that the base case for China is achieving that perfect mixture of incompatible goals, which is infinitely more difficult to be achieved than screwing the economy up.