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What goes up can come down

By Geoffrey Murray: 0 Comment(s)Print E-mail China.org.cn, November 14, 2011

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Lose-lose [By Jiao Haiyang/China.org.cn]

Signs that a prolonged upward surge in Chinese urban house prices may be over brings back memories for me of the real estate 'meltdown' that occurred in Japan some 20 years ago.

Perhaps the difference is that the Chinese government has been watchful enough to impose macro-controls and Premier Wen Jiabao has said these will continue to ensure a 'soft landing' for the property market. One can only hope this will happen.

Apart from the Japan crash, there was the 2008 global financial crisis, which started because of reckless mortgage lending in the United States that went far beyond the bounds of probity and left numerous people in serious trouble – not to mention the mortgage lenders; European home owners and banks also got their fingers burnt.

But, to return to Japan: In 1983, I bought a house in Kamakura, an ancient town some 50km from my Tokyo workplace (I couldn't afford anything nearer the capital). My purchase required a huge mortgage and the prohibitive monthly repayments was one reason for renting out the property in 1984 and moving to Singapore.

I hung on until 1990, when I sold at what proved to be the peak of the market, making a handsome profit-- even after paying all the loans. Weeks later, the real estate bubble burst, leaving numerous Japanese with properties worth less than they'd paid for them ('negative equity'); many couldn't repay loans and at least two banks collapsed under the strain.

In 2005, now happily settled in Beijing, I moved into a new two-bedroom (some 100m2) apartment near the Western Hills. Chinese friends bought it when the building was nothing but a hole in the ground and got a 'bargain' at around 750,000 RMB (just over US$118,000 now).

At last valuation, however, the price was over 5mn RMB (around $800,000), showing just how much inflation had kicked in and made home ownership an impossible dream for many young couples on limited income. The reasons for this drastic price increase were obviously that the property sits midway between two of Beijing's outer ring roads and also close to a major route into the city center.

Added to this, of course, has been the movement of vast numbers of people away from the city center under urban redevelopment programs and the growth of the city's population through extremely high rates of inward migration from other parts of China.

So, over a prolonged period, it was 'happy hour' for land developers and real estate companies, who may well have thought that the gravy train would run forever. Indeed, from 2009 until mid-2011, prices rose inexorably month-on-month, not only in Beijing but also in at least another 35 major cities throughout the nation, such as Shanghai, Guangzhou and Hangzhou.

Nevertheless, based on my own Japanese experience, I wondered whether this could possibly be maintained indefinitely. A real estate meltdown could be a disaster for China at this sensitive and perhaps overextended phase of its economic development.

In the West, whenever one invests in any form of stocks, the financial services company handling the deal will always point to the small print on the contract that says, in effect, "While prices may continue to rise, equally, they could fall."

Somehow, that message failed to get through to Japanese homebuyers (or government) in the 1980's. There was increasing indiscipline in the real estate market. Banks and insurance companies poured in money and construction companies invested heavily in land and bidding up prices with money obtained through non-banking companies. These companies acted as a conduit for bank loans to customers who failed to meet normal lending requirements.

The Tokyo government failed to control this and then made things worse by creating an excessive money supply. It did this by slashing interest rates to compensate for the Yen's appreciation against the dollar, which was hurting export-oriented firms.

They simply bid up prices 30-fold over the 1980s in the belief they could still sell at a profit some day. I still wonder what possessed the buyers of my house to pay such an over-the-top price when it was already becoming apparent an economic downturn was in the pipeline (indeed, one might argue that the Japanese economy has never fully recovered since).

Chinese who bought at inflated prices and are now objecting vociferously at falling prices might bear this in mind.

There's no doubt that some people in China have also caught a cold from the market downturn. The first sign of this is recent news of a growing number of closures among real estate brokerages amid declining business.

Government restrictions on the number of properties an individual can own, plus a tightening of the mortgage market, have helped dampen speculation. But many local governments seem over-reliant on the real estate market and central government plans to construct more low-cost housing have a long way to go. There's also a lot of 'hot money' around, so nobody can relax.

The author is a columnist with China.org.cn. For more information please visit:

http://www.china.org.cn/opinion/geoffreymurray.htm

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