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.

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.

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
No. 1-8
kpmyers
kpmyers

Mish, you nailed it about China. I totally agree that China is not prepared to be the world economic leader. What the China hype machine forgets...China has been practicing their quasi capital-command Frankenstein economy for only a couple of decades. China is a rank amateur at practicing capitalism. Their multiple decades of growth is a mirage, a result of years of cheap borrowing costs courtesy of the Fed, ECB, BOJ & BOC. China's economy wants all the upside of capitalism and no downside. So, China is trying to control the downside through government measures and intervention. Here's an example form the South China Morning Post

"China Securities Regulatory Commission (CSRC) distributed a memo, dated September 7, to financial institutions, including mutual funds and brokerages, instructing them to avoid making public comments that “lack professional prudence and substantial understanding of the market conditions,” according to the document obtained by the South China Morning Post."

Sorry, capitalism just doesn't work this way. The bill is coming due to China very soon. Unfortunately, the same could be said about the US.

Once China starts unloading all their bad debt, it will have a ripple effect. It could be happening in Australia right now. That country's current Real Estate market is decelerating. In North America, China has invested heavily in the West Coast, from California to Vancouver. The Chinese smart money doesn't only invest in Real Estate. I'm sure their Real Estate $ is all hedged with other financial instruments that will need to be sold off to offset some of these Real Estate losses.

thimk
thimk

been watching some utube posts of 2 expats living/working in china. China will implode.

Stuki
Stuki

I guess part and parcel of the communist identity, is to snub ones nose at economic literacy, just out of spite.

It's still hard to fathom how people can stay in power, while remaining so outrageously clueless about even the most fundamental principals of economics, that they cannot figure out that price bubbles exist, always and everywhere without exception, due to current, and perceived future, inability of supply to meet demand. Current and perceived future scarcity, in other words.

Which for well-understood-how-to-make goods, like toothpicks and covered living space, always and everywhere means artificial, government enforced scarcity. As absent idiotic government intervention, people will just cut up wood pieces until toothpick supply catches up and prices fall. And nail them together, until ditto housing prices. Neither if which is exactly difficult to do. As they, lo and behold, have successfully been done before. Up to several times, nonetheless!

Of course, reality is that mediocrity privileged well above their meager abilities, whether they be nominally communist like over there, or just plain idiots like over here, depend for their privilege on keeping people on the verge of homelessness as a matter of policy. That way, they can install themselves and their closest associates, as gatekeepers to a place to live and a stick to pick foodscraps from ones teeth with. So they can leech off the rest as unnecessary "middlemen", without having to burden their incompetent selves with doing anything at all productive nor worth vile in return for their unearned rent.

And, there as here, the idiots who are the designated patsies in the scam; are so thoroughly stupid and indoctrinated, they believe the nonsense that this is just how things have to be. That there is something natural about having to stand in line for days, for the "right" to sign up for permanent debt slavery in exchange for a toothpick in Florida. Or room in a shack in San Francisco or Beijing. Or whatever else those they have been told are their massas, tell them to believe.

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.

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.

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