China's Misread Property Bubble

Maybe I should have finished my first cup of coffee before reading this.

 China's misread property bubble

I found this informative mostly for the rhetorical style and as a peek into how the Chinese view themselves. I'll pick out this:

He explains that in the last 10 to 15 years of reforms, China has created immense wealth for its urban middle class. A very conservative estimate reckons that some 500 million Chinese collectively sit on at least 100 trillion yuan (US$15 trillion) of capital. (About 80%, or 500 million, of the roughly 600 million urban Chinese own their homes, constituting some 200 million family homes each worth at the very least 500,000 yuan

Dude, you can't count the real estate as wealth. It's just paper. The value is set by the margin. Not everyone could possible sell at the current price, there aren't enough buyers with that much money. Ergo, paper value.

These people are the foundation rock of social stability, the ones who have gained from the reforms, and now they have concrete capital to defend. The interests of those people must be defended and taken care of. A drop in the value of those assets benefits only a small minority of people who are looking for a flat to buy in the cities, but hurts the majority of the urban population concerned about their key financial asset and safety net. 

Yeah . . . and I wish I had a flying carpet so I could commute faster. Wouldn't a flying carpet be great? People made the same assumptions in the U.S., so I can't assume this is just intro to markets 101 missing here. There is some universal blind spot at work here. You need a buyer, with a completed transaction, to set the price. Those house-poor you so casually toss aside to live in an alleyway somewhere ARE your future price. In a healthy market, that is. That's the kind that lets owners have some predictability about their sale price. 27:1 price to income ratio, not a healthy market.

The rest of the population is also not completely deprived. Many are given lots of land in the countryside, where they have a house. The vast majority of the population thus has a stake in the overall stability of the country. Therefore, the goal of the state should be to protect those assets, which can also be monetized and given as collateral to banks or sold for other developments. 

Then forget a huge drop in real estate prices. They are more than assets to be traded in an inconstant market - they are guarantees of social stability. 

Bolding mine. This is all going to be so very interesting to watch. A massive controlled economy trying to keep a house of cards upright with the bottom row missing. I don't doubt they can do it for longer than everyone imagines.

The bulk of the article discusses market distortions caused by particular industries getting land and financing too cheap. Yeah, that would cause a market distortion, but where do we see the effects of this? If I'm building apartments and the land and money are free, my apartments would be cheapest. Walmartization, basically. But these cheap apartments, if they do exist, do so for only an eye blink. Like an Apple Store where no on limits the number of iPhones one can buy, someone will jump in, buy it cheap and resell it at the actual maximum price the market will bear. The distortions that really matter are elsewhere. Low mortgage rates, for example. Unrealistically low carrying costs. Unrealistic expectations. Irrational exuberance. Untraditional financing that turns everyone into a mini Bernie Madoff. Lack of diverse investment opportunities. Fraud. Those are your market distortions.