Will China Support Home Prices?

A look back at the U.S. recession and the halted growth that has followed shows that two portions of the economy where at the core of the slide — jobs and housing. In 20/20 hind site, if the nearly $800 billion of stimulus invested by the federal government to reverse the slide had been directed largely at either of these, the recession might have been less deep and the home market might have come closer to holding its own. That could have kept hundreds of thousands of home mortgages from slipping underwater. The federal government even dropped the home purchase tax credit, which accelerated the drop in home prices.

China’s real estate market shows signs of mirroring what happened in America between 2006 and 2008. But China has a chance to prevent its housing market from looking like the one in the U.S. between 2008 and 2010. Does the Chinese government view housing that way, or is it intent on a market correction that will quickly find a bottom? The message from America is that no such bottom may exist.

When China’s central statistics bureau issued housing data for May, 54 of the 70 markets measured showed drops in prices of new homes. The numbers are even worse when the fall-off in the two largest markets — Beijing and Shanghai — are taken into account. Each fell more than the national average.

Officials in the People’s Republic have shown no sign of panic as GDP growth has dropped from the nearly 10% it posted for a decade to barely 8% now. China does have the means to mount another stimulus similar to the one it did in 2008. For now, the central government is satisfied to make money more easily available through its banks. This will work, but probably only temporarily if China’s PMI and exports do not pick up. China’s new middle class has not developed the consumption patterns of American consumers. A slight slowing of GDP may make the Chinese middle class more cautious, which could drive them back to their old habit of saving and not buying.

Some Chinese officials have stated that the home market in the country looks like the kind of bubble that forms in an economy operating on the edge of overheating. There is plenty of evidence, though, that China does not have that problem. Recently, inflation has dropped considerably. Home prices now are following that inflation pattern down. And a quick, brutal slide in home prices will have the same effect as in the U.S. The consumer will lose much of the confidence that rising or even stable prices give.

Douglas A. McIntyre