By John Richardson
THE above chart shows the affordability of real estate in China’s Tier 1 cities (its biggest cities) as of June 2013 compared with many of the world’s other “rich cities”.
Why the speech marks around “rich cities”? Because believe it or not, some people are still clinging onto the idea that China’s big cities are rich by Western standards even though we know that:
- China’s average per capita urban incomes were still only $3,294 in 2014, according to the National Bureau of Statistics. This would be a long way below the poverty line in all the non-Chinese cities listed above.
- The only reason why anybody could afford to pay this incredible ratio of house prices to wages in China was that purchases were not based on wages. Instead, they were based on the “wealth effect’ created by the 2008-2013 economic stimulus package.
- The fact that 49 million apartments were sitting empty in 2013 – 22% of the total – underlines the fact that the property boom has been driven by investments in multiple properties by the super-rich. Surplus housing in China could take as long as six years to be fully absorbed now that the “wealth effect” is over.
- Despite a recent slight decline in property prices, affordability still remains a huge issue for young people in China. For example, Shen Lu, a 24-year-old recent college graduate, is paying one-half of her salary in rent for an old and very run-down apartment in Beijing. In December of last year, residential properties in Beijing averaged $2,229 per square metre. A tiny 50-square-meter (538-square-foot) apartment would cost $111,000, a fortune in a city where university graduates make an average of $523 a month.
So how does China fix this problem? This might well be one of the discussions during and on the side lines of the country’s annual parliamentary meeting, the National People’s Congress, which begins today.
Perhaps the answer is this:
- When you buy a home in China, you will always remain a leaseholder, as the government owns all the land. Many of the empty apartments could thus be appropriated by Beijing and turned into low cost social housing. More of China’s real middle class would thus own property for the first time, and so would have more money to spend. This would speed-up the rebalancing of the economy way from investment and towards domestic consumption.
- Housing oversupply is said to be more acute in China’s relatively smaller Tier 3 and Tier 4 cities than its huge Tier 1 and 2 cities. These smaller cities (mere populations of several million, rather than 10 million and much more!) tend to be in less-developed areas of China. So converting empty properties to social housing would fit in with China’s intention to narrow the economic gap between its less-developed and more-developed regions.
- And as for China’s huge cities, which remain the strongest magnet for migrating rural people, converting empty real estate into social housing would also be a neat solution to another problem: The low spending power of migrants versus those born in the big cities. This could be combined with a relaxation of the Hukou residency-permit system, which restricts migrants’ access to pensions and subsidised education etc.
But what about all the investors who own this real estate? They are often politically well-connected and so might well fight tooth and nail against a social housing initiative like this.
And what about the financial contagion all of their debts turning bad?
Wouldn’t they also, surely, once such a scheme was announced, seek to move even more wealth offshore? This might well result in an acceleration of capital flight, thus adding to China’s deflationary pressures.
China, though, is China. It is not the West. It is worth stating this blindingly obvious fact because China is often still judged by Western standards. Supporting the “social housing” solution are these factors:
- There are no bankruptcy laws in China and so real-estate developers could walk away from their debts. This is reportedly already happening.
- Also, there is no social stigma attached to losing a fortune. I heard a story this week of developers, who, after walking away from a financial mess unscathed, quickly won directorships in new companies because their experience is so highly valued.
- China’s central government, these days, has the political muscle to force-through what seems such a radical, left field idea by Western standards. The government’s main measure of success here would be: “Have we created more winners than losers?” The answer would be “yes”, unlike the failed 2008-2013 stimulus package.