China is Worried about rising Property Prices

Posted by PITHOCRATES - February 23rd, 2013

Week in Review

Housing sales are booming in China.  And prices are soaring.  So much so that the government is taking some action (see China Orders More Cities to Restrict Housing Purchases by Bloomberg News posted 2/21/2013 on Bloomberg).

China told local authorities to “decisively” curb real estate speculation and take steps to rein in the property market after prices rose the most in two years last month…

The government’s almost three-year effort to curb property prices has included raising down-payment and mortgage requirements, increasing construction of low-cost social housing and restricting home purchases in about 40 cities. Authorities also imposed a property tax for the first time in the cities of Shanghai and Chongqing.

Why all the concern of rising property prices?  Because of what happens when they stop rising.  Like they did in the U.S.  When people were paying mortgages that were greater than the market value of their houses some of them walked away.  And let the bank have their house.  As more did more foreclosed houses entered the market.  When interest rates rose on Adjustable Rate Mortgages (ARM) some could no longer pay their mortgage payment.  And they, too, let the banks have their houses.  Putting more foreclosed houses on the market.  With more houses on the market prices fell further.  Putting more people underwater in their mortgages.  And so on.  Until the U.S. eased itself into the Great Recession.  Just as the Japanese eased themselves in their Lost Decade when their asset bubble burst.

This is what the Chinese want to avoid.  That downward spiral of prices.  Deflation.  Sending their economy into a tail spin.  Like the Japanese are still trying to pull themselves out of some two decades later.  Because housing sales are the biggest driver of the domestic economy.  Building houses.  And furnishing houses.  It all adds up to a lot of economic activity.  Which the Chinese want so desperately so they are not wholly dependent on their export economy.  For they really don’t want to end up like the Japanese.  But they probably will.  As the Chinese are trying to manage the economy too much.  Just as the Japanese did.  All that government partnering with business.  It just doesn’t build real economic activity.  Because you have bureaucrats making economic decisions.  Not the market.  And bureaucrats often get things wrong.  Unlike the market.  Especially when it comes to asset bubbles.  When the market creates them they’re not that big and the corrections are not that painful.  But when the government creates one with their excessive interference into the free market economy you get a Lost Decade.  Or a Great Recession.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , ,

Comments are closed.

Blog Home