China fiddles while real estate market gets ever hotter
I love a good dither. Especially when it’s cloaked in language that makes it sound like decisive action
This morning’s headline in the Financial Times reads “Beijing acts over housing bubble.” Sounds like China did something significant to control an inflating asset bubble that saw housing prices climb at an 11.7% rate in the last year. For context that’s the fastest rate of increase in housing prices since the Chinese government began keeping this data in 2005.
What did Beijing do?
The government raised the required down payment to 50% from 40% for anybody buying a second home. The down payment for a first home larger than 90 square meters was set at 30%.
There’s no reason to think that this is going to slow a real estate market that saw long-term land leases (since no one can actually buy land in China) soar to $205 billion in 2009. That was a 40% increase from 2008. (There’s no indication that the pace is slowing. Property investment was the biggest contributor to GDP growth of 11.9% in the first quarter of 2010.)
If a 40% down payment didn’t slow this market, it’s unlikely that a 10 percentage point increase will make much difference.
Especially because, as we know all too well from the U.S. mortgage boom and bust, it’s extremely easy to get around down payment rules when lenders are more than willing to let you borrow the money you need for a down payment in a second “independent” transaction.
The truth is that too many officials at all levels of government and the Communist Party are making too much money out of land and property sales to really want to bring the game to an end—or even to slow it significantly. It wouldn’t be all that hard to deflate the bubble by raising interest rates but that still seems like a move the government is trying to avoid.
The longer a bubble is allowed to expand, the more violent the eventual bursting of the bubble is.
If there’s one thing you think the world would have learned from the U.S. mortgage crisis, you’d think that would be it.
You’d think. But apparently you’d be wrong.
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Jim,
I read an article that said there was chatter that Jacobs Engineering was going to be bought by a private equity takeover. Here’s the article:
http://www.reuters.com/article/idUSSGE6380JM20100409
Do you have any thoughts on this?
So eventually that bubble and its popping snould drive Gold prices threw the roof, right?
Jim,
Do you see today’s GS issue as a good time to buy some things or should we run for the hills?
Today’s GS story will send shock wave through out the market because it’s unexpected, but I don’t think the fundamental change yet. In fact, giving some “shock” treatment to Wall St. firms may not be bad thing.
Hi Jim
Thoughts on the GS story?
thanks.
Dangerous move. The rich have no problem to get around laws, special relationships with the bankers, officials, etc. Plus they are the speculators owning several properties. But the average guy under pressure from family, girlfriend, etc. to purchase the first home has no way to get 40% down payment. Especially with the current home prices. Apartments in second tier cities are getting more expensive than homes in the Heartland. Doesn’t make sense when the salary is less in China. Get ready for implosion, only a question of when.