China’s housing prices, determined not to plummet!

I wrote an article before:

“Why aren’t prices rising in China? It’s the easiest thing to tell you!”

Many people may think that I want China’s housing prices to fall, especially in the big cities.

Before we get to that, let’s take a look at the latest housing prices in major cities around the world. Data and charts from Ran Zapping’s “Comparison of Global Housing Prices in First-tier Cities: New Edition 2022”.

In terms of the absolute value of RMB (converted into RMB at the current exchange rate), the central areas of the global core cities (Niching District of Dongcheng District of Beijing, within the inner Ring of Shanghai, District 1 of London, Lower Manhattan and Midtown of New York, Hong Kong Island, etc.), according to the open data of Number, In May 2022, Hong Kong ranked first with 270,000 Yuan per square meter, while Beijing, Shenzhen and Shanghai ranked second, third and fourth with real housing prices of 193,000 Yuan per square meter, 178,000 Yuan per square meter and 177,000 Yuan per square meter, respectively, while Guangzhou ranked eighth with 132,000 Yuan per square meter.

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To put it simply, the housing price in the core areas of big cities in China is no problem in the world. The housing price in the core areas of other major cities in the world should be far away.

We are No. 1 in absolute value, relative value, rent/sales ratio and revenue ratio. Only when we include the “equal floor space” that exists in 4-dimensional space that people do not live in, we come in third place.

Correspondingly, if you want to buy a house in the core areas of big cities such as Beijing, Shanghai and Shenzhen, your monthly income level must at least reach the minimum threshold of 100,000 Yuan.

As a modern aspirant youth, born as a big city, die as a big city ghost, why do you want to stay in the big city?

The core area of the city is deep and expensive. Shall we buy the outer area?

I’m afraid there is no small difficulty.

In the outer areas of the core areas of big cities, Hong Kong of China still ranked first with 148,000 Yuan/m2, while the outer areas of Beijing, Shanghai and Shenzhen ranked second, third and fifth with 109,000 Yuan/m2, 93,000 Yuan/m2 and 73,000 Yuan/m2, respectively, after Hong Kong of China and Guangzhou at 59,000 Yuan/m2. It came in 16th.

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Well, absolute value, relative value, rent to sales ratio, revenue ratio, we’re still number one in the world, even if you take into account the magic algorithm of floor space, we’re still number one. No problem!

That is to say, now, if you want to buy a house in the outer areas of the North, if the monthly income does not reach 50,000 Yuan/month level, you don’t think about it.

Everyone, except those who own a mine or have a father, can compare their income.

At a time when China’s per capita GDP is only a fifth to a quarter of that of developed countries, shouldn’t housing prices in such expensive big cities fall?

To some extent, I really hope that China’s housing prices will fall sharply, especially after the “supply-side reform” in 2016, China’s urban housing prices skyrocketed, which can be described as “unconscionable”. Finally, almost all young people with some ideas could not afford it except to buy a father.

“Ganglia tens of millions, all the poor people of the world are happy”, house prices, shouldn’t fall?

Alas, my reason tells me,

China’s housing prices, resolutely cannot fall, especially cannot slump!

Why?

Because house prices are more than just house prices

Housing price, related to the real wealth of thousands of households, more related to the operation of China’s entire private credit system, and even, bearing a considerable part of the achievements of China’s reform and opening up since 2000.

The real wealth of millions of households is illustrated by a graph from China International Capital Corporation research.

In 2019, real estate (excluding land) in China accounted for more than 60 percent of the total wealth of Chinese residents, the highest among the five largest economies, and more than twice that of Americans and more than three times that of Japanese and British residents.

There is no doubt that the house is the most important wealth of the Chinese people today.

Then you can understand that if the housing price plummets, it means that all the people who hold real estate in China, their wealth will be greatly reduced, and a considerable number of people with high mortgage, even very likely to zero.

Many people may not be familiar with the credit system related to the whole of China’s private sector.

Under the credit system, in the contemporary macroeconomic analysis, a country is usually divided into household sector, non-financial enterprise sector, government sector and financial sector, in which the government sector is the distributor of wealth, while the financial sector is the credit provider and credit circulator in the economy, and is essentially the distributor of wealth.

The only real wealth creators are the household sector and the non-financial corporate sector.

As mentioned above, real estate is the most important asset of China’s household sector. In fact, real estate + real estate are also the most important asset of most of China’s enterprise sectors, and it is also the most important collateral for residents and enterprises to bear debts. If the housing price falls significantly, it means that the overall credit of Chinese residents and enterprises and their overall ability to bear debts will be greatly reduced.

This means that the production and consumption capacity of the whole Chinese society will be greatly reduced compared to the previous, and the social purchasing power will be greatly reduced. Specifically, a large number of enterprises have no orders; the vast majority of residents can not earn money, and dare not spend money. Almost all people will enter the situation of hard to earn money and no money to spend, and the economy will fall into a deep recession.

Even this disaster is secondary.

Notice from the figure above, the overall debt ratio of China’s household sector and non-financial enterprise sector has reached a very high level. However, this debt is rigid and will not be reduced by the decline of housing price. When the housing price drops significantly, everyone’s debt remains the same scale, which means that a considerable number of people will suffer from debt crisis.

Because the value of the mortgage is shrinking, financial institutions will require residents and enterprises to supplement the mortgage, which will cause them to have to sell their real estate, which will further cause the housing price to fall. Then, once the mortgage supplement still fails, countless enterprises will go bankrupt, financial institutions will have countless bad debts and debts, and countless people will commit suicide because they cannot pay the debt…

Because China’s current debt leverage is higher, while its per capita GDP and wealth are much lower than those of the United States at the time of the subprime crisis and Japan at the time of the bursting of the economic bubble, this means that if the current housing price crash in China, China may fall into a worse economic depression than the United States in 2008 and Japan in 1991.

Do you think this is a catastrophe?

Finally, let’s talk about the housing price is related to the achievements of China’s reform and opening up.

There are many young people among my readers. They probably find China is a country with excessively high housing prices from the very beginning. However, they are also used to China’s excellent public services, such as high-speed rail, commercial centers, public security, water, electricity and gas supply, etc. Such infrastructure and public services are far better than those in other developing countries.

These are the fruits of China’s reform and opening-up, especially since its accession to the WTO in 2001.

In fact, high housing prices and good public services are linked together

All the beauty in the short term, there is a price!

It is precisely because of the control of land supply for urban housing that all local governments have received excessively high land transfer fees, which is equivalent to levying a heavy tax on all house buyers and real estate agents. Then, the transfer fees are used to pay for the cost of sound public security and public services.

The essence of high housing prices is a heavy tax.

We have access to security, infrastructure, water, electricity and gas supplies that far exceed those of the average developing country, thanks to the high cost of land transfer. In the short to medium term, without this funding, these services would be lost.

In addition, since 2003, China has exempted all agricultural taxes, and now it even provides subsidies for farmers to plant land. How do you think the money for local governments to run a large number of agricultural areas in China comes from?

The plummeting housing prices will inevitably lead to difficulties in selling land, and local governments will lose revenue from land sales. Public services that we have enjoyed in the past may be discounted or even disappear. We should all be prepared for this.

In fact, just a few decades ago, countless farmers in China, including my own family, fled the land under the burden of agricultural taxes. Not to mention, around the 1990s, because money is hard to earn, numerous robberies, theft cases occurred, at that time, long-distance bus robbery is almost common, and ordinary trains, thieves everywhere…

If housing prices collapse and local governments run out of money, the lack of infrastructure maintenance and public services in many parts of China could well plunge society back into the chaos of the past. By contrast, the wealth of China’s urban residents has been decimated by plummeting property prices.

These are the reasons why China’s housing prices should not plummet.

 

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