It was only a “mini-stimulus” that was delivered by China’s new leaders in July. Well, thank goodness it wasn’t more, to judge by the above chart from Albert Edwards at SocGen. It shows how house price inflation has jumped in 69 of China’s 70 main cities between March and September:
- In March (orange column) inflation was averaging between 2% – 4% versus March 2012
- By September (red) it was averaging between 6% – 9% versus September 2012
- Prices in hot spots such as Beijing and Shanghai were up 20%
- Only Wenzhou saw falling prices, now down for 23 months as its private sector slows
The problem is a mix of naiveté, greed, and the lack of a comprehensive state-run social security system.
The naiveté comes from the fact that China only began to develop a private housing market in 1998. Until then, all urban housing was built and allocated by the state. There was no word in Chinese for ‘mortgage’. In rural areas, peasants built homes on land allocated by the state. So people have no history to guide them.
The greed comes from the fact that house prices have never fallen in the past 15 years. There have been a couple of brief slowdowns in 2008 and 2012, but the government quickly responded with measures to support the market. So most people now assume prices will continue to double every two to three years.
The lack of basic social security, coupled with the ‘one child policy’ means young men wanting to marry are expected to own a home. “Housing, a stable income and some savings” are ‘must haves’ when meeting the prospective father-in-law. With only 100 women for every 117 men, he can insist that the groom is able to support his daughter.
Thus the supposed ‘mini-stimulus’ has caused prices to race ahead again. Everyone believes that the government would never let prices fall. The only problem is that those of us living outside China know this is wishful thinking. Either the government will finally take firm measures to crash the market, fearing major financial instability and social unrest. Or the bubble will pop of its own accord.
Meanwhile, for the moment, the situation remains out of control, as the Financial Times noted last week:
“Property prices have almost quintupled in leading Chinese cities over the past decade and they are perhaps the biggest single threat to the country’s economic and social stability. For the economy, the fear is that China is in the middle of a property bubble that will eventually burst and trigger a financial crisis. For society, frustration about housing prices is widespread and their continued rise only fuels more discontent.”