China's Effort to Rein in Property Bubble Creates "Rental Loan" Bubble as Well

Rental loans, intended to ease the cost of living in big cities, contribute to China's property bubble mess.

Once an economic bubble is inflated, it is damn near impossible to let the air out slowly. China's effort to rein in a property bubble by making it harder to buy homes has the price of rent soaring.

The Wall Street Journal notes China’s Property-Market Woes Deepen With Rising Rents.

> Rental prices for apartments are accelerating by double digits in 30 of China’s biggest, most vibrant cities. In Beijing, rents are up as much as 21% from a year ago, while in the south-central megacity of Chengdu they have climbed more than 30%, according to the China Real Estate Association, an arm of the country’s housing ministry.

> To try to take some of the pressure off prices, the government encouraged people to rent instead of buying. That policy appears to have backfired in part. Property-leasing companies jumped into the rental market, acting as the middlemen between tenants and landlords. To secure more rental units, the agents promised landlords rents above market rates, and to entice tenants, they offered “rental loans” allowing rent payments in smaller installments.

> Hu Jinghui, a former vice president of 5I5J Holding Group Co., a large property brokerage, warned Chinese media in August about the rental market in more than 10 cities on a conference call.

> “The situation is very disorderly,” Mr. Hu said. “It’s out of control,”

Great Uprooting

This all goes back with China's forced effort to get people to move to cities.

On June 15, 2013, the New York Times reported China’s Great Uprooting: Moving 250 Million Into Cities.

> China is pushing ahead with a sweeping plan to move 250 million rural residents into newly constructed towns and cities over the next dozen years — a transformative event that could set off a new wave of growth or saddle the country with problems for generations to come.

> The government, often by fiat, is replacing small rural homes with high-rises, paving over vast swaths of farmland and drastically altering the lives of rural dwellers. So large is the scale that the number of brand-new Chinese city dwellers will approach the total urban population of the United States — in a country already bursting with megacities.

> The ultimate goal of the government’s modernization plan is to fully integrate 70 percent of the country’s population, or roughly 900 million people, into city living by 2025. Currently, only half that number are.

When you force 900 million people into cities, you can expect problems. All kinds of them. And China has them.

Resultant Problems

  1. Property bubbles
  2. Massive air pollution
  3. Massive water pollution
  4. Exploding rents
  5. Insolvent banks
  6. Corrupt State-Owned-Enterprises (SOEs)

Job-Seeking

There's one more major thing this mass migration did: It brought down the price of labor.

People who were happily farming suddenly needed to find a job, in a city, when they had no skills other than farming.

To create jobs, china chose export mercantilism.

The price for labor plunged, and the cost of pollution ignored.

Bubble Expansion

When bubbles expand, property and economic bubbles add to GDP. When the bubbles finally break, and cleanup costs and insolvencies soar, GDP goes into the gutter.

This is another reason all these people thinking China will soon overtake the US as an economic power do not know what they are talking about.

Every few months we see such claims. Here are a few rebuttals.

  1. China's Alleged "Victory Plan" Over the US Dollar
  2. Petroyuan's Crash at Birth
  3. Forget the Yuan: King Dollar is Here to Stay

Yes, the US has a lot of problems, but China's problems are far worse.

China is not remotely prepared to be the global economic leader.

Mike "Mish" Shedlock

Comments (14)
No. 1-8
abend237-04
abend237-04

This will lead directly to the quintessential committee solution, rent control. Rent control will lead to foreclosed and rotting real estate, leading back to Tienanmen Square and another try for freedom.

caradoc-again
caradoc-again

The more "wise authorities" try to control any market the more distorted and inefficient it becomes.

2banana
2banana

Gee...

Hard to figure out who is going to buckle first in a trade or tariff war.


"To create jobs, china chose export mercantilism."

Matson
Matson

The rent to price ratio in China has always been much higher than western environments.... Typically over 3:1 compared to North America. Rising rents were going to happen, but with shady Chinese middle people get involved, a shit show is right around the corner. I would expect some kind of state intervention to quell the problem, followed by three times as many problems than the solution offered.

SMF
SMF

Not only does China have a massive property bubble, but they also have a demographic timebomb of epic proportions, exacerbated by the prevalence of boys and their sense of entitlement over being a single child. China WILL have huge problems in the future.