Why property prices in China won’t fall

February 25, 2011


By George Chen
The opinions expressed are the author’s own.

Let’s face it — it appears there is only upside for property prices in China.

Chinese officials from Premier Wen Jiabao on down to small city mayors have been telling the public they will try their best to keep property prices under control and have indeed done much in the past 12 months via tightening monetary policy and government restrictions on property purchases. The result? Unfortunately, the more they talk, the more disappointed Chinese people feel.

The People’s Bank of China, the country’s central bank, has so far raised bank required reserve ratios (RRR) nine times since January 1 last year. The most recent on February 18 brought the RRR to a record 19.5 percent. The theory is that as banks place more money with the central bank, market liquidity should tighten and buying power for everything, not just property, should weaken.

China’s central bank has also raised its benchmark interest rate three times since October 19, most recently on February 8. Again, in theory, raising both deposit and lending rates can offer defense against fast-raising inflation, cooling some overheated sectors and also discouraging people from buying property, given the higher mortgage rates.

However, we all know that what works in theory doesn’t always carry over to the real world. So, what’s happening in the real world these days?

Property prices in Shanghai, China’s financial capital, rose more than 1 percent year on year in January. The increase came after the city announced a controversial new property tax plan that angered the growing middle class. For Hong Kong’s neighbor, Shenzhen, price levels rose 2 percent, surprising even local officials who had expected a greater impact from the city’s most recent restrictions to limit property purchases by non-residents.

In Hong Kong, a new apartment project in the popular downtown nightlife area Soho went on sale last week. A 400-plus sq ft unit was offered at about HK$18,000 per sq ft — and although you have to pay up front, you also have to wait a few months before you get the key. About three months ago, after the former British colony announced its toughest policy efforts including a high additional transaction tax targeting property speculators, a three-year-old apartment sold for about HK$12,000 per sq ft.

Now, even the city’s property agents are shocked by the pace of the increase. When Hong Kong property prices matched the peak seen in 1997 late last year, many people expected a crash. Now the 1997 peak looks more like the new bottom from 2010.

This week, China’s top five banks decided to scrap mortgage rate discounts for first-home buyers in some big cities such as Beijing and Shanghai as part of the latest round of efforts led by the government to cool the red-hot property market. Last year, they removed discounts for buyers of second and third homes. Can this zero-discount policy for first-home buyers, which is widely considered the last effort by Chinese banks to help the government rein in property prices, really have an effect this time? I doubt it.

So, what’s the core reason preventing property prices in China from falling at the government’s behest, despite the toughest policy curbs in the past one to two years? The answer is simple – there’s just too much money about. If you think even deeper, the true and sad story is that all this liquidity is in the hands of too few people in China and those people simply don’t care about mortgage discounts or other policy curbs.

The more challenging question is: why is so much money is held by so few people? This may be part of the so-called “deep-rooted and underlying problems” that government leaders from President Hu Jintao to Hong Kong’s Chief Executive Donald Tsang are studying. Can they solve it? It will take time, and we’re unlikely to see a solution before the end of the Hu administration.

The “deep-rooted and underlying problems” are about why the income gap in China is expanding instead of shrinking as China becomes the world’s No.2 economy. It’s also about the way some people can make money so quickly and easily while others cannot. In other words, does corruption contribute to the rise in property prices? Is today’s market dominated by “special interest groups” rather than genuine home buyers who just want a place to live?

From this perspective, interest rate increases and other property market restrictions simply aren’t game-changers as these factors are not the key rules for the game in the capital markets. Sad but true, expecting property prices to fall 50 percent in a year just because the Big Five banks remove mortgage rate discounts for first-, second- and third-home buyers may be, I have to say, too naive.

I suspect the only time property prices will become more acceptable is when Beijing is able to narrow the income gaps between the super-rich, the middle class and the poor.

We don’t care whether property prices fall or not, what we care about is whether we can afford to buy the property. When the general public becomes richer as individuals, and even these high property prices become more affordable, we may hear fewer complaints.

George Chen is a Reuters editor and columnist based in Hong Kong.

Photo: A couple is accompanied by a sales agent (R) in front of the model of a property development, at the 5th China (Shenzhen) Real Estate Fair in the southern Chinese city of Shenzhen May 4, 2010. REUTERS/Bobby Yip


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Property price won’t drop, at least for 1-2 years. Demand and supply tells the story. Those who don’t get a flat now please think carefully to get one before you go for rent!!!

Posted by billylo | Report as abusive

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inflation is “5.4%”, or maybe more accurately, 5-8%.
Deposit rates are 3%, and the standard lending rate is about6.1% to 6.5% at state-owned banks.
What this means is that you are losing money by putting it into the bank, AND your business is losing if you DON’T borrow, assuming real inflation is in the midpoint of the 5-8% estimate.
So with all this cash flooding in (Trade surplus, due to RMB), and uncontained inflation, it only makes sense to borrow and invest in real assets, like real estate.
China needs to raise the lending rate to 2+% above the inflation rate to control home prices (not mortgage rates, regular lending rates).
With Deposit rates at 5% or so, and lending rates at 8% or so (2% higher), the economy will simmer down, but that might cause a lot of pain. So if China just keeps riding it out a quarter point at a time, the pain is delayed, but inevitable.

Posted by Adam1234 | Report as abusive

The real question is, Would you rather live in China or the US. The answer is still heavily in favor on the US side and most likely will be that way for a very, very long time.

Posted by EagleDriver | Report as abusive

what’s the core reason preventing property prices in China from falling at the government’s behest, despite the toughest policy curbs in the past one to two years? The answer is simple – there’s just too much money about. If you think even deeper, the true and sad story is that all this liquidity is in the hands of too few people in China and those people simply don’t care about mortgage discounts or other policy curbs.

Posted by jeb951s | Report as abusive

As a chinese, I am worried about the people’s lives.

Posted by jeb951s | Report as abusive


Posted by Val38 | Report as abusive

[…] Speaking of income gaps and how to solve them, I wrote a column before my holiday and I took the property market as a case study. Read it here. […]

Posted by George Chen | Analysis & Opinion | Reuters.com | Report as abusive