#dnaEdit: China’s property slump

Chinese property markets currently are gripped by contrarian hopes and fears. The ordinary Chinese, mostly the young, are hoping that house prices will fall, while big developers who have spent fortunes building mammoth complexes, are anxious about their business. They have developed huge office blocks; they have also built residential properties. But these are luxury private homes and apartments, fit only for the rich. How pricey are they? Giving an indication of the prices at a sales fair in Hangzhou, a BBC report says: “The sales agents explain it is a “perfect apartment” for a three-person family — a family that can afford $900,000 (£530,000), that is.” This is proving to be a lethal combination.  

With increasing frequency, reports are appearing about slides in property prices. In a way, this is the end result of government policy to rein in the run-away property prices of a couple of years ago. The authorities had clamped down restrictions on ownership of multiple homes and other kinds of properties. The banks were advised to insist on larger down payments for loans of property purchases. Overall, monetary policy was made more stringent and interest rates were raised for property loans. All those measures are now impacting the market and prices are falling. Coupled with this, the expectations that property prices will still fall are restraining people from buying just now.

But then, concern is mounting about the possibility of a crash in property markets, at the current rate. More so, because like everything else in China the scale of fresh construction still remains far too large.  A property crash could be dangerous and it could hurt even the Communist Party leaders and important politicians. The government is actually looking forward to seeing prices fall, but then it should be slow and not gather momentum. 

So the question uppermost in most minds: will there be a crash in the property market? Given the experience of United States following the sub-prime loans phenomenon and the overall banking crisis in Spain, Italy and other European countries following slide in property prices, a large scale reduction in property prices could usher in an overall macro-economic crisis. Is China facing a similar threat?

Nicholas Lardy of the Peterson Institute of International Economics, one of the most respected outside experts on the Chinese economy argues that even a crash in its property market should not cause much of a ripple provided that some corrective measures are initiated forthwith. Lardy’s recommends a restructuring of the Chinese property construction sector. What he points out is that despite a surfeit of supply of high-cost residential and commercial space, demand for housing continues to be unmet.  Lardy suggests that government should allot more money for “social housing” which should satisfy the home demands of ordinary people. A heightened purchase of such houses by the ordinary Chinese would drive up the demand for all industries from consumer durables — from  electrical goods to cement and steel. 

Such an approach should be also in sync with China’s efforts to achieve  an overall policy shift. China is in the midst of recasting its development model from investment and exports to consumption within the country. 

Maybe, this has lessons for India as well. A greater emphasis and actual spending of funds on government housing schemes could hold the key to driving up India’s growth. Such housing projects can generate fresh demands for a variety of industries and activities. Why not try it out for a change?