2012-07-08

Is China losing control of the housing market? Or is this the housing market's last gasp?

Chinese leadership is running scared that the economy is finally out of their control as jawboning of the real estate market steps up.

China Must Prevent Rebound In Property Prices, Wen Says
Local governments that introduced or covered up a loosening of curbs on residential real-estate must be stopped, Wen said during a visit to Changzhou city in eastern Jiangsu province, according to the official Xinhua News Agency. Restricting speculative demand and investment in property must be made a long-term policy, he said.

...“We must unswervingly continue to implement all manner of controls in the property market to allow prices to return to reasonable levels,” Wen was quoted as saying when he met residents and local government officials in charge of affordable housing. “We cannot allow prices to rebound, or all our efforts will come to naught,” he said.
Not only will their efforts be for naught, they will have been to the detriment because the public will learn that the government, even when it uses all of its power to enforce an economic policy, cannot achieve its objective.

I find it strange that China bulls think the rise in the property market is bullish and signals a strong Chinese economy. Growth will resume in the housing sector, but rising property prices will be accompanied by higher inflation at a time when exports are suffering and there's a general slowdown, with credit growth contracting. High inflation in a slowing economy is a recipe for very high inflation—and rising crop prices in America will throw gasoline on the CPI fire. This is a political worst case scenario for the CCP.

Which is why the central government is dropping the hammer on local governments:

住建部:若房价大幅反弹调控松动 地方将被问责 (Housing Ministry: If prices rebound and regulations slacken, local governments will be held accountable)

Local officials are promoted based on a variety of criteria, one of which is GDP growth. Additionally, they rely on land sales to finance local government spending. The central government appears to be changing the formula, however, by threatening local officials who do not carry out Beijing's orders to reign in home prices.

China home prices could fall again
Recent gains in Chinese house prices might be a result of misguided expectations, according to economist Yi Xianrong of the government-affiliated Chinese Academy of Social Sciences, writing in the state media Thursday.

In commentary for the China Daily, Yi said the price rise has taken place without easy credit, making it strange in a historical context. "The current rise in house prices has, to a large extent, been a result of misinterpretation of the government's policies to stimulate the economy, an increase in real-estate speculation, and excessive concerns among ordinary home buyers that prices will continue to rise," Yi said.
I am in agreement with Yi, the real estate market is likely to turn down again. But the events of the past month and the government's response indicates that they're not sure they can pull it off. The use of rhetoric and now threats of punishment for local officials indicates that there's worry in Beijing. This may itself be a reaction to the bubble, and in keeping with socionomic theory, the Chinese government will ratchet up the restrictions on the housing market even as it is structurally weakening. Nevertheless, I still remain open to the potential for the central government to lose control of the economy, completely, with the housing market bubble reflating, inflation rising and the yuan depreciating.

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