Wednesday, October 6, 2010

China's Misread Property Bubble, Part 2

Misread is right. This same strange belief about bubble housing prices being supply side pops up again in this much better written article.

Angry Storm Over China's Housing Bubble
Dr. Liu, a research fellow at Peking University, believes that the speculative land purchase binge that peaked in 2009 was a result of the $600 billion stimulus money the central government pumped into the market at the end of 2008. The majority of the amount, experts say, has been invested in the real estate market by SOEs. 
The SOEs comprise the majority of the “land kings,” said a Guangzhou Daily report. Their spending has played an important part in driving up land and housing prices.

The stimulus money is your culprit. Speculators tapped into that money to buy 3-4 units each and by leaving them empty, they create a chronic shortage for the owner-occupier buyers, the angry ones mentioned in the article. Otherwise you are arguing that people wanted apartments, so SOEs built apartments, lots of them, boatloads of them, and somehow that influx of supply made the price go sky high. Seriously. Does that make any sense at all? 

Stated another way: Say that in a village of 10,000 people there is a minor wok shortage, say 1,000 people could really use a new wok. So an SOE comes in builds a wok factory, makes 5,000 woks and the market distortions of free land, cheap steel, and low financing, they sell them for bargain prices, 6 yuan each (about a $1). In a normal market, the 1000 people get a wok and 4,000 get an early replacement because they are so cheap, why not get one. But instead of this normal consumptive market, let's instead say that the villagers decide they are going to retire on the value of the woks they have hoarded in their attic. NOW we have the real estate market in China. Everyone spends every last penny they can beg and borrow to buy as many woks as they can, from anywhere they can. The 1000 poor wokless slobs are still wokless and some 1000 of the more money savvy villagers own 5 woks each, certain they are going to be rich rich rich, forever.

But everyone blames the high wok prices on the SOE and the state that gave them the land for the factory and the bank that loaned them the money at 0% interest, because that HAS to be the reason woks are unattainable for the ordinary villager.

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