China Tries To Cool Overheated Property Market

The Chinese government raised the level of the minimum down payment that its citizens must have on second homes to 60% from 50%.

The People’s Republic authorities also said the local governments should put price targets on the value of residential real estate values in their regions. It is not clear that local authorities will go along with this. Their cooperation  may be determined by how many homes these officials own.

The fact that some Chinese can make a 50% down payment on any home is a sign that there is still a great deal of “hot money” in the real estate market. Some of it is almost certainly due to the liquidity created by the $585 billion China stimulus package. Some may be due to rapidly rising wages among the middle class. Some may have to do simply with the demand for better homes in better places. This follows a similar pattern in the US. Second homes became popular half a century ago and the appetite for them continued off and on until the recent real estate collapse.

The Chinese are trying to pull liquidity out of their economy. It may take a long time. The country seems  to be awash in capital to which businesses and consumers have easy access. The plan to raise the minimum down payments for second homes will have little impact. Certainly the much broader programs which have raised bank capital requirements have not buckled the knees of inflation or GDP growth.

China has only taken half-hearted measures to get its bubbles to deflate and they seem to be ineffective. The price of second homes is hardly at the core of China’s inflation problem. The central government will have to increase interest rates more aggressively to siphon money away from consumers. This action has often been said to be a probable future cause of a sharp drop in China’s growth trajectory.

The balance between inflation and growth is centuries old. So is, in almost all cases, the lack of solutions.

Douglas A. McIntyre