Remember that guy who ran for mayor of New York City by shouting, “The rent is too damn high?” Chinese authorities have taken his lament to heart, setting “reference prices” for secondary apartment sales in half a dozen expensive cities. That signals a problem that goes well beyond the spectacular crackup of overleveraged developer
China Evergrande Group
Beijing’s tinkering with China’s valuable internet platforms may concern global investors more. But housing is China’s perennial challenge as it seeks to balance capitalist dynamism with socialist ideals and a Communist power monopoly.
Real estate construction and investment has been both driver and outlet for the country’s burgeoning wealth, accounting for some 20% of gross domestic product.
Signs of overheating are real enough. Chinese household debt has ballooned to 62% from 39% of GDP since 2015, largely through residential mortgages, reports Larry Hu, head of China economics at
Prices in Shenzhen, the tech hub that is China’s answer to San Francisco, have jumped by half in the past three years, pricing ordinary families out. “Surging house prices are the biggest contributor to wealth inequality in China,” Hu says.
Tapping on the brakes through tighter mortgage requirements didn’t really work in the face of pent-up postpandemic demand. Neither did President Xi Jinping’s imprecation that “housing is for living in, not for speculation.”
So the government moved to laying down how much it thinks preowned apartments should cost—in Shenzhen, its neighboring southern boomtown of Guangdong, and elsewhere. Its figures are up to 50% below market prices, realtors report. It’s not a crime, yet, to sell or buy higher than the reference price. It will guide mortgage lenders’ appraisals, though.
China has less draconian means to restrain housing costs. The most obvious solution is to build more. But authorities are also worried about developers’ debts. They instituted the “three red lines” on builders’ leverage a year ago, which China Evergrande (ticker: 3333. Hong Kong) scrambled unsuccessfully to comply with.
Introducing residential property tax is another option. That would limit the attraction of buying and warehousing investment properties. Fear of a property owners’ backlash has stayed the state’s hand so far, though, says Tracy Chen, a portfolio manager for global credit at Brandywine Global.
So Xi and his comrades are trying reference pricing, which is predictably spawning ingenious workarounds on the street. Brokers in Shenzhen are posting prices in fruit code—1 million yuan ($155,000) per banana—or adding “premiums” for furnishings to square reference with reality, Nikkei Asia reports.
The good news is that other big Chinese developers took on less debt than Evergrande, and are moving toward red line compliance without undue stress. “I don’t think the lines will be disruptive to construction going forward,” Chen says.
Tightening can’t go on forever either. Local governments depend on land sales for revenue (in the absence of property tax), and untold millions depend on construction to feed their families. Hu expects a shift back toward housing stimulus sometime next year.
Meanwhile Chinese property stocks are taking a beating. The
Global X MSCI China Real Estate
exchange-traded fund (CHIR) has fallen 30% over the past three months, to prices well below half of book value on average. Investors may want to wait before bottom-fishing, though. Turbulence for the sector is just starting.
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