Big house mania leaves many in red (Shanghai Daily) Updated: 2006-03-17 14:31
Right now, one of the hottest economic debates in China is about
housing.
The majority of the people involved loudly complain of the soaring
housing prices. For within two years housing prices went up by as much as 50 to
70 percent, and even higher in big cities like Shanghai, Beijing and Hangzhou.
A couple of economists in Beijing have talked about Chinese banks
having been "taken hostage" by the housing market and mortgage loans, and they
are not far from the truth.
On the other side, there are people, believed to be land
developers and their friends, who strongly argue that these prices are
reasonable in the sense that they reflect the market, un-connected to the profit
grabbing they are accused of.
Some even cited the price levels of foreign metropolises like
London to justify the pricing levels in Shanghai. Isn't Shanghai already vaunted
as a modern metropolis?
Well, when all is said and done, there must be something wrong
with the housing situation today.
If not, how come the wide-spread national debate and the strong
and emotional accusations flying around?
Then, what's wrong? It seems more helpful to find out what's wrong
than who's wrong. To seek an answer, perhaps there is something that people have
failed to notice.
Ironically, the trouble comes as the flip side to the rapid
economic development.
Chinese people, particularly the urban dwellers, buoyed by their
seeming affluence and lured by the mortgage money they have never seen or even
heard of before, suddenly show an eagerness in bringing their housing up to the
Western standards.
Improving housing itself is not wrong. But by how much and how
fast, few people stop to think. The people as a whole are actually shooting at a
target years before they can actually afford it.
Roughly speaking, white-collar workers in major Chinese cities who
want to take possession of a "nice" apartment have to borrow more than 1 million
yuan (US$124,400) in mortgage. This plus the 30-year compound interest payments
and also high furnishing costs will come to somewhere between 1.5 to 2 million
yuan.
That would mean that the happy newly weds have to pay a monthly
installment of roughly five thousand yuan for 30 years. That means that they
will have to set aside, for the overwhelming majority of them, 50 percent to 80
percent of their monthly income!
To put it another way, their financial plan looks grossly
questionable, if not hazardous. What intoxicates these young and smart heads?
Meanwhile, older folks are not much better. They, under the social
pressure to keep up with the Joneses, show similar eagerness.
What is far more relevant is the larger picture. If the eager
wishes of the Chinese for "decent housing" were to be fulfilled within a short
time, then China would have to face an impossible picture: Vacant land in the
urban area used up and most of the farmland disappearing for good before we even
blink our eyes. Even the space for roads and parking cars would be unavailable.
There are about 500 million Chinese, that is about 150 million
families, living in urban areas in China. Let's do a simple calculation: If each
family borrowed 1 million yuan, the supply of total funds would be astronomical:
150 trillion yuan. Then when this demand showed on the market, the prices would
rocket.
Our media, perhaps innocently, have been painting a picture to
their Chinese audience of the happy life in those developed nations: Houses,
cars, electrical appliances, etc.
But, the media seldom if ever point out what that happy life would
cost in physical terms for China, a country with 20 percent of the global
population and only 4 percent of global GDP.
Have we been paying attention to this unrealistic and excessive
consumerism that some media are fanning up?
That is not to say that people must not buy their own new housing.
But the pace has to slow down and desires must become more rational.
Of course, it is not just the mismatch between the "natural" wish
for a happy life and the limited supply that has produced the housing market
woes troubling Chinese families.
The market is also subject to manipulation and fraud.
The most harmful is the induced fever of speculative investing in
housing in the expectation of excessive profits.
It is hard to believe that the self-fulfilling prophecy that it's
possible to make good money in trading housing could get around so quickly. But
many cities did witness this rumor spreading like wild fire. That is truly
dangerous if allowed to continue.
Finally, governmental provision for "budget housing" for the needy
is no solution. The system operating now does not guarantee that the goal of
this policy can be reached as planned.
It goes against the market in that this "cheap housing" has a
higher market value, and the value premium would lead to unfortunate operations
contrary to the original designer's wish.
Putting a lid on the housing prices is no solution, either, for
the same reason: It goes against the market.
It may soon shift the blame and the eventual responsibility onto
the government agencies, which by nature are not in a position to decide on a
definitive fair price.
The government hands doing that will push China back to the time
of a planned economy.
The solution, if it is a good one, has to come with the sincere
and serious cleansing of the housing market's bad operations, punishing and
stopping illegal and harmful practices.
The national realization of the "scientifically feasible living
standards enhancement model" has to receive strong emphasis from now on.
It takes insistence and patience to sink this idea into people's
minds. That of course takes time.
The woes came pretty fast and such woes will go away slowly. Slow
is not bad: Allowing the housing prices to steadily return to their natural
levels is the optimal policy choice.
Drastic measures may prick the bubbles and result in dangerous
economic fluctuations.
To turn away from these serious challenges and hope to muddle
through will only postpone a even bigger crisis.
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