Whack-A-Mole in China’s Bubbly Housing Market

IMF Blog, August 9, 2011

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Whack-A-Mole in China’s Bubbly Housing Market

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Bibliographic details

• Authors: Nigel Chalk
• Published: August 9, 2011

Overview and framing

• The essay compares China’s heated housing market to the fairground game Whack-A-Mole, where intermittent, localized policy actions push down visible price pressures but underlying forces keep re-emerging.
• Various high-profile commentators (James Chanos, Andy Rothman, Nouriel Roubini) express diverse views about a potential property bubble; public attention is drawn to anecdotes such as empty apartments and “ghost towns in Ordos.”
• The central premise: a healthy property sector is essential for China’s economy because housing links to upstream and downstream industries (steel, cement, glass, furniture, refrigerators, automobiles).

Key drivers fueling property price inflation

• High domestic savings held captive by capital controls that limit international diversification.
• Limited domestic investment outlets for these savings; the bulk are held as bank deposits earning interest “well below the rate of inflation.”
• Cost and tax structure that makes buying and holding property attractive:
  • “It’s cheap to buy property and hold it, waiting for the capital gains to accrue—there’s no property tax, no capital gains tax, and the real cost of financing home purchases is still very low.”
• Structural demand support from rapidly rising living standards and ongoing urbanization expected to persist for years.

Assessment of market conditions

• Result: real estate markets in some of China’s largest cities “look decidedly bubbly.”
• Data fragmentation and vocal anecdotal commentary complicate assessment across cities from Beijing and Shanghai to smaller megalopolises.

Government responses and near-term effects

• Measures implemented:
  • Limits on speculation.
  • Restrictions on purchases by non-owner occupiers.
  • Curbs on leverage and limits on loan-to-value ratios to protect the financial system.
• Effects observed:
  • Dampening of prices.
  • Reduction in the volume of “frothy” transactions.
  • Continued healthy pace of private investment and construction.
  • Improved calibration of measures over time via “learning-and-doing.”
• Characterization: these measures “are all having a tangible effect” but are described as treating symptoms (pace of price increases) rather than root causes.

Policy recommendations (deep-rooted solutions)

• The author argues that sustainable resolution requires structural changes:
  • Higher interest rates (on both deposits and loans).
  • Efforts to create a broader set of financial assets for the population to invest in.
  • A broad-based property tax that covers the majority of China’s housing stock.
• Political and temporal constraints:
  • “None of this will be politically easy and it will all take time.”
• Intended outcome:
  • Create an environment “where households view their apartments as shelter rather than as a (literal) concrete store of value.”

Implication and concluding scenario

• Short- to medium-term implication: policymakers will need to continue deploying administrative controls periodically, akin to repeatedly playing Whack-a-Mole, tightening measures successively to counter recurring property-market imbalances.
• Long-term implication: only comprehensive financial-sector and tax reforms can convert episodic administrative interventions into sustainable macroeconomic stability.

Source: Whack-A-Mole in China’s Bubbly Housing Market, Nigel Chalk, August 9, 2011

Content in this bundle

• iMFdirect 博客: 中国泡沫住房市场的“打鼹鼠”游戏, 2011 年 8 月 9 日
  • iMFdirect 博客: 中国泡沫住房市场的“打鼹鼠”游戏, 2011 年 8 月 9 日 (Markdown version)
  • iMFdirect 博客: 中国泡沫住房市场的“打鼹鼠”游戏, 2011 年 8 月 9 日 (PDF)