Tuesday, October 18, 2016

A Housing Bubble in China: A Rationale for Government Intervention

As of October, 2016, China was in the midst of a dizzying housing bubble. A month before, “economists at the Bank of China warned in a report that worsening asset price bubbles were adding to a frothy market that could result in trouble.”[1] Shanghai’s average housing price was up nearly one-third from a year before; prices in major cities like Beijing and Guangzhou were not far behind.[2] The recognition of the bubble—which does not come easily—should have triggered counter-cyclical measures by the Chinese government.

For example, the government could have increased the minimum requirements for down-payments and even increased tax on purchases of additional properties to counter the impact of speculators. Rumors alone of these measures was enough in 2016 for many couples to file for divorce “so that one partner could still be treated as an independent buyer” so as to be able to buy additional properties as investments.[3] That people would go to such an extreme based on rumors points to how carried-away market bubbles can get. For this reason, increasing the minimal down-payment and associated taxes even on a couple’s purchase of one property may not be excessive.

Adding to the difficulty in curtailing the boom was the “growing amount of American-style debt.”[4] Long-term household loans (mostly mortgages) doubled as a share of total official bank lending in 2016 through mid-October. In August, the loans accounted for about 40 percent of all new loans, contrasted with just 20 percent at the start of the year. The value of new home-loans as a percentage of all housing sales surged to a record high. Underground lenders were also feeding the boom. Unfortunately, the loans facilitated the role of speculators in the market, whom I submit play a crucial role in any market-bubble.

Unfortunately, the loans stemmed from the lending oriented to keeping the Chinese economy growing. As long as the government wanted to use leverage as a fiscal stimulus for the economy, clamping down on bubble-facilitating, long-term loans could only be difficult at best. Hence the need for tightened government-regulations making the loans less easy to get, especially but not limited to additional properties. One challenge for regulators in such a context is to enable the poor to become homeowners even as unnecessary home-buying is stymied until the bubble has been shrunk.  In other words, regulators should have distinguished home-ownership as a basic human right (and in this sense not a commodity) from home-ownership as an investment—and these two in turn from overall economic growth.

1. Neil Gough and Carolyn Zhang, “In China, Property Frenzy, Fake Divorces and a Bloating Bubble,” The New York Times, October 16, 2016.
2. Ibid.
3. Ibid.
4. Ibid.