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China’s new leadership face house price dilemma

Consumer demand
By Paul Hodges on 24-Jan-2013

Shanghai Jan13.pngMs Kay Sun is a 32 year-old administrative assistant in Shanghai, earning $29k/year (Rmb180k). Last month, like many 30-somethings around the world, she put down a deposit on an apartment. But the cost of Ms Sun’s ordinary one-bed apartment was in a different league. It was priced at $460,000 (Rmb2.85m). And as the Wall Street Journal reports, her purchase is considered ‘normal’ in today’s China.

China’s urban property market only opened up in 1998. Before then, the state owned everything, and told you where to live. Even today, peasants in the rural areas build their homes on state-owned land. So families have never known a property crash. They are comfortable chasing prices higher because they believe “the government would never allow prices to fall”.

This was certainly true of the past 10 years. The government allowed rampant speculation to drive house prices through the roof to compensate for modest incomes, as it tried to create a ‘middle class China’. But today’s apartment prices are now well beyond the reach of most ordinary Chinese, with average per capita urban incomes just $4k in 2012.

Thus the new leadership may have different priorities as official newspaper China Daily notes:

“Recent reports of the monetary authorities and the Chinese Academy of Social Sciences both say high housing prices have already seriously affected ordinary people’s livelihood and undermined their capability to buy a house. The excessively high proportion of income that ordinary people have to set aside to buy a house forces them to drastically cut their consumption in other fields, which is not good for the overall economy…

“If the new leadership shows zero tolerance toward speculation and expedites efforts to implement sweeping reforms in the housing market, such as adopting harsher credit and taxation policies, to deflate the price bubble, then the market will jump back on the track of reasonable and healthy development.”

Bursting the bubble will have potentially nasty affects in the short-term. But as Ma Jiantang, China’s Statistics head, noted on Friday, a shift in policy “to narrow the rich-poor gap” is now essential for the country’s longer-term stability.