Affordable Housing Institute : US

As risk re-pricing is now sweeping the globe, it will touch every moneyed nation, whether it be debtor (the US) or creditor (China).  Even as the US economy undergoes its multi-stage recapitalization – first HERA, then TARP, now the Obama-nibus Stimulus Bill – we will get a first-hand experiment in how different financial ecosystems respond to mega-shocks.  From the looks of this Wall Street Journal article, the Chinese real estate market isn’t dropping, it’s cracking:

 

Even if that’s only the first derivative, it’s worrisome

 

As far as my limited knowledge extends, the Chinese housing finance ecosystem appears much less complex than the US’s – and hence, much less responsive and robust.  For instance, as I posted two month ago:

 

China has a massive affordable-housing problem exacerbated by the long-delayed migration of rural Chinese into the cities; that, in turn, is a function of China’s antiquated land use laws and land resale policies.  The Chinese claim to be liberalizing owners’ ability to sell agricultural land, but some observers I’ve read think the reforms are mainly optical, not substantive.

 

The statement said rural and urban incomes would be increased.

 

By printing money?

 

This is your economy after stimulus?

 

Actually, printing money appears to be what they’re planning:

 

BEIJING — China said it will expand public housing and urged real-estate developers to cut home prices, as it tries to boost housing sales and the construction industry to support the weakening economy and avert further job losses.

 

Cutting prices will certainly make things more affordable, but will that revive the economy?

 

Prices are “still not affordable for ordinary people,” four government agencies said in a joint statement. “The key to revitalizing the real-estate market is to set reasonable prices,” the housing ministry, finance ministry, central bank and the National Development and Reform Commission said.

 

Set reasonable prices? 

 

Why didn’t I  think of that?

 

To be sure, that’ll make things more affordable, but is the problem affordability – or illiquidity?

 

At a news briefing on Tuesday, officials said the government will build more government-subsidized and affordable housing.

 

That’s certainly nice – but adding supply will actually decrease demand and will not make existing housing any cheaper.  Prices have to fall.

 

Maybe not literally

 

Officials didn’t offer new ideas for boosting sales, which have been falling together with house prices in recent months.

 

Like the rest of the world, China is not immune to the global de-leveraging. 

 

The downturn in the housing market has had broad ramifications in China as builders’ demand for steel, copper and other raw materials shrinks, and consumers buy fewer appliances and electronics.

 

My demand for you is shrinking

 

As de-leveraging reduces the velocity of money in circulation, the economy has to slow down.

 

Official forecasts still call for China’s economic growth to ease to about 8% this year, but some private economists worry growth could be much weaker if the housing market doesn’t recover.

 

In most economies, housing – especially new housing production – is a major economic driver, because housing is so capital-cost intensive.  Building more houses booms an economy. 

 

“The healthy growth of the property sector is very important for the economy’s healthy growth, for fostering consumption and for improving people’s lives,” Huo Yingli, deputy director of the central bank’s financial market department, said at the briefing.  Government data show the construction industry employs around 9% of the urban work force.

 

Failing to sell built houses brings it to a screeching halt.

 

Where’d the buyers go?

 

As has now happened to China:

 

Housing sales in the January-November period were down 20.6% from a year earlier, and prices have been falling at an increasingly rapid rate as developers accelerated price cuts beginning in mid-October. Prices in November were down 0.5% from October, compared with a fall of 0.1% in August.

 

In terms of affordability, stand up and cheer.  While in general home prices are always at an equilibrium just at the fingertips of one’s financial grasp, when there is sudden oversupply, due to collapse of demand, large pockets of temporary affordability open up. 

 

People walk past an advertisement for a luxury housing project in Beijing.

 

This happened to California and Texas during the early 1990’s (post-S&L bailout), and is happening in several places – like Las Vegas, Miami, and California’s Inland Empire – now. 

 

The government on Tuesday praised such price cuts for having had some effect in boosting sales. But officials worry that too much of China’s population is priced out of the commercial housing market. So the government will add 1.3 million affordable housing units each year from this year through 2011, according to Tuesday’s statement.

 

While I’m skeptical of future-tense verbs, this sounds less like a housing-affordability strategy and more like a public-works program.

 

Great Depression: the Civilian Conservation Corps building national parks

 

“The government’s aim now is to maintain stable public sentiment,” said Chen Zhi, chairman of Shenzhen-based real-estate developer Causeway Bay Group. “On the one hand, they don’t want property prices to fall sharply. At the same time, they want to deal with the fact that property prices are still too high for most people. So they choose subsidized housing as a measure to tackle this problem.”

 

Even allowing for translation imprecision, this sounds impossible.  To keep prices high, you need people to buy.  But to get more people to buy at higher prices, you need to stimulate demand – either with earnings or with favorable lending.  If you add need affordable supply, you undercut that demand pressure.  That’s great for the lower-income households, and probably good for China long-term (affordable housing is good for healthy societies) – but in the short-term, it’ll exacerbate the price drop.

 

There are concerns that the increase in public housing will divert buyers from commercial housing projects.

 

Further, Chinese housing prices do need to drop.  Markets have to clear; the longer clearing is blocked, the harder the landing.

 

Should have adjusted altitude earlier

 

Qi Ji, vice minister of housing and urban-rural construction, said at the briefing that the government’s projects target the poor and won’t hurt the commercial housing property market.

 

Of course that’s utter nonsense.  Housing finance and occupancy are an ecosystem, and in an ecosystem, everything affects everything else.

 

The only silver lining?  Because new construction takes a while to get to occupancy, there may be job creation and capital expenditure/ investment long before there’s any relief on the housing-affordability front.

 

If that’s your definition of a silver lining …

 

Silver lining?  Hmm …

 

Joan Wang, senior manager of the Research & Consultancy department of Savills Property Services (Beijing) Co., said housing sales are unlikely to pick up quickly because of the dimming economic outlook, unless the government introduces measures such as allowing buyers to deduct their home purchases from income tax.  [Presumably they mean interest on such purchases – Ed.]

 

In his farewell address, outgoing Treasury Secretary Hank Paulson touched the third rail of politics, suggesting that the US rethink its incentives for homeownership.  He can do that because he’s departing and no one takes his pronouncements as having any political relevance.  Here’s the flip side – an industry desperate to prevent a price implosion proposing an incentive that, however short-term its origins, could be with the nation forever. 

 

Beware of t he … mortgage interest deduction?

 

But a finance ministry official signaled that new tax incentives are unlikely in the near term.

 

Finance ministries always say that sort of thing.

 

The government has already cut mortgage rates and transaction taxes, and new measures announced last month will exempt more people from paying property-sales taxes.

 

Policy theorists take note – the quickest and easiest stimuli are cuts in taxes, because the money is already in people’s pockets.

 

Wang Xiaohua, a deputy director of the tax department of the ministry of finance, said the government will examine the effectiveness of moves in 2008 before taking any further action.

 

Finance ministries always hate giving up revenues.

 

Analysts say the government’s measures suggest it is more focused on boosting housing sales and construction activity rather than supporting prices and developers directly. But the government is also looking for ways to ease the financing squeeze faced by many property developers.

 

The State Council announced a trial program last month that would let developers form real-estate investment trusts to raise funds.

 

Fine, fine.  REITs are good – they’re an efficient form of long-term ownership of income-producing real estate – but seem a useless initiative here.  The properties in question aren’t producing income, they’re assets held for sale.

 

Ms. Huo of the central bank said government agencies are discussing a plan to launch the trial and will send a proposal to the State Council after discussions. She didn’t provide a time frame.

 

I think we can fairly say it’ll be too late.

 

 

China’s property market is in mid-crash.

 

 

 

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