My reply to a question on Quora about Chinese Property Prices over the last few years.
The question was in two parts – firstly, why have they risen so much, and secondly, will they continue to rise in the same way.
Firstly, shortly after Premier Wen Jiabao took office in 2003, Chinese economic policy changed to allow cheap credit for construction and purchase of property. Interest rates remained low, and lending increased massively through until 2009.
It seems probable that the trend continued in 2010, but year closeout figures have not been officially released, though a report in the Guangzhou Daily based on unofficial figures suggests that average price per sq. m. could have risen by as much as 24% in 2010 –
(English-language reporting from China Daily of the Guangzhou Daily story)
It should be noted, however, that compared to the lending practices of Western Europe, Australia, New Zealand and the US over the same period, Chinese lending remained conservative.
Secondly, average incomes rose considerably over the same period. According to a World Bank report in November 2009, property prices had broadly kept in line with incomes. (If anyone could find a direct link to this report, please let me know, and I’ll add a citation).
Thirdly, compared with citizens of the West, Chinese nationals are relatively limited in their ability to invest in overseas markets. Consequently, compared to the West, a higher proportion of Chinese investment went into the domestic market. The natural impact of more investment money being funnelled into a particular market is, of course, inflationary.
There are two hotly debated questions on the future.
Firstly, whether the price increases over the last 7 years genuinely constitute a boom (in the sense of whether they are sufficiently far above historical norms that reversion to the mean would imply that they need to fall relative to earnings.
Secondly, if the Chinese Government determine that prices, indeed, need to fall relative to earnings, they will be able to implement policies that ensure a “soft-landing” (a period in which nominal prices stay fixed, or go up slowly, while nominal incomes rise faster.)
I would counsel you to take anyone making firm predictions with a dose of scepticism. If the period from 2007-date has taught us anything, it is that making accurate predictions about property prices is notoriously difficult.
That having been said, my personal opinion of the economic ability of the Chinese leadership is high. (I speak as a Western European), and the nature of the government structure in the People’s Republic makes it easier for a government to enforce structural changes that it would be for a Western government.
To my mind, therefore, there are two separate risks that need to be assessed, in considering whether a slump will occur.
- The possibility that the housing boom will, indeed, prove to have been a bubble, and the Chinese Government be willing, but unable to contain it.
- The possibility that the housing boom will, indeed, prove to have been a bubble, and the Chinese Government coming to the view that a quick correction would be in the national interest, and therefore take no steps to prevent such a correction.
It seems, to my mind, that one of these will happen, but whether it will happen in 2011 or later is a matter on which I don’t feel I have enough evidence to comment.