Remember that guy who ran for mayor in New York City shouting, “The rent is damn too high?” Chinese authorities have taken his complaint to heart, setting “benchmarks” for sales of secondary apartments in half a dozen expensive cities. This signals an issue that goes far beyond the dramatic break-up of the over-indebted developer.
Evergrande Group in China
Beijing’s tinkering with China’s precious internet platforms may be of further concern to global investors. But housing is China’s perennial challenge as it seeks to balance capitalist dynamism with socialist ideals and a monopoly of communist power.
Construction and real estate investment have been both the engine and the outlet for the country’s burgeoning wealth, accounting for around 20% of gross domestic product.
The signs of overheating are very real. Chinese household debt has climbed to 62%, from 39% of GDP since 2015, largely thanks to residential mortgages, reports Larry Hu, head of the Chinese economy at
Prices in Shenzhen, the tech hub that is China’s answer to San Francisco, have jumped by half over the past three years, excluding ordinary families. “Soaring house prices are the main driver of wealth inequality in China,” Hu said.
Curbing with tougher mortgage requirements hasn’t really worked in the face of pent-up postpandemic demand. Nor is President Xi Jinping’s imprecation that “housing is for living, not for speculation.”
So the government decided to figure out how much it thought second-hand apartments should cost, in Shenzhen, its prosperous neighboring city in southern Guangdong, and elsewhere. Its figures are up to 50% below market prices, real estate agents report. It is not a crime, at this time, to sell or buy above the benchmark price. It will, however, guide the assessments of mortgage lenders.
China has less drastic means to control housing costs. The most obvious solution is to build more. But the authorities are also worried about the debts of the promoters. A year ago, they instituted the “three red lines” on manufacturer leverage, which China Evergrande (ticker: 3333. Hong Kong) has tried unsuccessfully to comply with.
Another option is the introduction of residential property tax. This would limit the attractiveness of buying and storing investment property. Fear of a reaction from homeowners has so far remained in the hands of the state, says Tracy Chen, portfolio manager for global credit at Brandywine Global.
Xi and his comrades therefore try benchmark prices, which, as one would expect, spawns some ingenious workarounds on the street. Shenzhen brokers display prices as a fruit code – 1 million yuan ($ 155,000) per banana – or add “bounties” for furniture to match reality, reports Nikkei Asia.
The good news is that other top Chinese developers have taken on less debt than Evergrande and are moving towards red line compliance without undue stress. “I don’t think the lines will disrupt construction in the future,” Chen says.
Tightening also cannot last forever. Local governments depend on land sales for their income (in the absence of property taxes) and millions of people depend on construction to feed their families. Hu expects a return to the housing revival next year.
Meanwhile, Chinese real estate stocks are taking a hit. The
Global X MSCI China Real Estate
Exchange Traded Fund (CHIR) has fallen 30% in the past three months, at prices well below half of book value on average. However, investors may want to wait before digging deep. The turbulence for the sector has only just begun.