Rigidly relying on the demand for housing reflects an unpromising future of the market. Real estate has always been dominated by the rich.
From ancient China to Europe, land has been centralized in the hands of big landlords or aristocrats, who hire farmers to work on the land. The value of farm land depreciated after the first Industrial Revolution, while urban land appreciated.
When society moved into a highly industrialized era, a house on 0.1 acre of land could be priced higher than 100-acres of farmland in a rural area. The capital market then came into shape in industrialized societies whereby social wealth is relatively evenly spread, and people’s interests are more tightly tied together. Real estate became a major part of the financial market as a result of real estate securitization.
Since China joined the WTO, foreign investment funds, often amounting to hundreds of millions of dollars per project, entered the Chinese market. Such funds, coupled with bank loans, became the main force in the real estate market, and attracted smaller private funds to follow suit. The large amounts of capital quickly pushed up housing prices, and drastically expanded the previously very small housing market. Since 2009, real estate speculation became a popular investment method in China, and almost everyone who could afford it joined in the game.
After 2012, the so-called “rigid buyer demand” was widely propagandized as a key market driver. However, those who have a “rigid demand” are mostly lower income people who have to borrow from friends and family to make the down payment. At that point, the large funds had either already been retrieved, or had been stranded.
Most of the private funds from smaller investors were also locked down. Though more lower-income people who believe in the propaganda are still entering the market, there’s increasingly less new money coming in.
By the second half of 2014, there was hardly any large real estate investment.
Experienced investors know that the market’s good times are coming to an end when low income people become the key target buyers. Unlike the U.S. mortgage crisis that resulted from government- and financial institute-backed home purchases by the lower income groups, the disaster for the Chinese real estate market comes from over exploiting private assets.
Unable to sell
The deeper people are involved in today’s Chinese real estate market, the less confident they are. Many people think of housing prices as an indicator of the health of the market. That is why the rising housing prices keep some consumers optimistic about the market even when transactions have become stagnant. But the volume of actual transactions is in fact the true measure of a healthy market, given the high price and low liquidity of the housing market. The price itself means nothing, if no actual sales happen.
In some first-tier cities, those who own multiple properties have sensed the problem, and have tried to sell at the market price. But when the properties are listed, no inquiries are received at all, even after they lower the price significantly.
In the meantime, because the banks now grant few loans for existing properties, most buyers have to use commercial loans with a high down payment and high interest rate to purchase houses. As banks further tighten loans, buyers in many areas will need to purchase with full payment, which is unlikely in most cases.
Most owners are not sure how they should price their properties. To make things even worse, the local governments set high “reference prices” for the houses, and charge taxes based on those prices. So although owners are willing to lower prices, it is still hard to sell.
Private sellers are starting to realize that their assets, however high their value looks on paper, have no liquidity. Unfortunately, such a realization usually comes too late. Those who bet all or most of their assets on real estate are panicking, because they are about to lose their source of post-retirement income. That will be especially difficult for older people.
At this point, except for some lower income and economically uninformed people who are still considering purchasing for their own use, many have seen how bad the market is. Confidence is dropping, dragging purchases down with it.
Local government pain
But the local governments are even more fearful. The halt in real estate transactions means government revenue is flowing out. Soon the governments will be confronted with all the pains of bankruptcy, like defaulting on salaries, pensions, and healthcare payments.
As a result, on the one hand, local governments have thrown out all kinds of market-stimulus policies—not so much to revive the market as to lure in purchases; on the other hand, they urge the regime’s central government and the central bank to print more money, like they did in 2008.
From the local governments’ perspective, only another large scale over-issuing can help sell the houses and bring in revenue. Though Beijing expressed willingness to support the real estate industry, the chances of printing large amounts of money are minimal, to the despair of the local governments.
The collapse of the real estate market will no doubt accelerate the demise of the system, because officials on all levels have raked in additional “grey” income from real estate. Now that such income will decrease sharply, the mid-low level officials will notice a significant cut in their income and welfare, and will lose motivation. Therefore, the regime will find it more difficult to keep the system running.
A side effect of this is that the local governments will take every opportunity to exploit people in order to solve their imminent crisis and maintain the regime’s operation. As a result, more frequent and more violent conflicts between the government and the people will ensue, especially over land-related disputes.
Local governments will have a hard time getting funds to repay loans and bills of construction projects. In places where the financial situation is relatively better, officials will spend as much as they can in order to make money for themselves before the government revenue drains out. The officials will also transfer their family and personal assets out of the country more actively, so that they can leave as soon as possible before the situation becomes even worse.
Simply put, the freeze in the real estate market will lead to the disintegration of interest groups in China’s society. The nature of the Chinese economy is a communist totalitarian economy, supported by central Communist Party control, local support, and social followers (private and foreign funds).
Such a model resembles that of an army in which the headquarters rule through several key branches, and send large numbers of soldiers to fight and die. In such a system, infrastructure and real estate are two key pillars of the economy, and thus key tools for sucking private wealth into the centralized state economy.
The fall of the real estate market marks the outflow of private wealth, and loss of interest from the remaining wealthy owners.
Now, the regime can hardly manipulate public funds no matter how hard they try.
When private investors start thinking about their own profits and stop purchasing property blindly, the economic system will disintegrate due to the lack of fresh blood. That is similar to an army whereby many soldiers are running away, and the officers are losing control.
Local economic systems are the weakest link in the machine. The local governments are haunted by debt, lack of income, and overspending. The central economic system is relatively stronger, but due to the impact from infrastructure construction and real estate market stagnancy, the central government is experiencing slow growth in tax revenue, and the state-owned enterprises see their income dropping as well.
As conflicts over limited profit grow sharper, the central government, local governments, and general public are having increasingly different economic interests. Any significant economic changes will further split those three groups, and all will seek security and profit in different ways. A society torn-apart is the “Chu song” before the final collapse of the Chinese economy.
This article is first of a series by the mainland China netizen-author “Born 0715″ at the Institute of Chinese Economy and Culture Study. It is translated from the original Chinese article.