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This post was edited by sfphoto at 2014-12-1 22:35|
CultureCritique Post time: 2014-12-1 10:54
The issue is not why USA does this or that; the issue is why China made a poor investment in housing in which much of the housing still remains empty.
In 1998, China adopted the FREE-MARKET system for PRIVATE-HOUSING, replacing the SOCIALIST system of PUBLIC-HOUSING. In theory, the FREE-MARKET should allow HOUSING SUPPLY to meet HOUSING DEMAND based on the PRICE-EQUILIBRIUM graph, as depicted below:
As seen above, the point at which the Demand Curve ("D") meets the Suppy Curve ("S") is the MARKET-DETERMINED price which would be stabilizing factor for the housing market. Macroeconomic factors such as interest rates, inflation, GDP growth rate, GDP per capita, population growth, land supply, etc. are presumed to affect either one or both of the curves.
The FREE-MARKET system of PRIVATE-HOUSING broke down due to REAL-ESTATE SPECULATION.
In a normal market, supply should keep pace with demand thus stabilizing the price. If buyers can't afford the houses, then demand does down thus lowering the price. As prices go down, developers would stop building more houses thus reducing the supply. With lower prices, more buyers could now afford the houses thus increasing demand.
What happened in China?
As the PRIVATE-HOUSING market developed into a multi-billion yuan industry, REAL-ESTATE SPECULATORS found out that the easiest way to make money from the PRIVATE-HOUSING market was to buy lots of flats by borrowing from State-owned banks. When China started the PRIVATE-HOUSING industry, there were no laws on the books against buyers buying up multiple flats, no rules on how much debt a buyer can take on a flat, no taxes on the resale of flats, etc. The idea initially was to wean off the State from assuming the financial burden of providing PUBLIC-HOUSING to urban residents, effectively offloading this crucial function of the SOCIALIST system to the FREE-MARKET system. No thought was given to the possibility of REAL-ESTATE SPECULATORS hoarding flats thus distorting the PRICE-EQUILIBRIUM function of the FREE-MARKET system. Under the SOCIALIST system of PUBLIC HOUSING, almost every urban resident had a place to stay. But under the FREE-MARKET system of PRIVATE HOUSING, tens of millions of flats remain unused while tens of millions of urban residents live a hand-to-mouth existence spending their incomes on rentals. The following graph depicts the HOUSING AFFORDABILITY ratios for key cities in China:
The above graph shows that housing affordability for the Tier-1 cities of Beijing, Shanghai and Shenzhen have the worst price-to-income ratios. The years after 2008 saw the greatest increase in the price-to-income ratios because of the financial stimulus injected into the property sector after the Global Financial Crisis of 2008, as depicted in the following graph:
It was only after 2010 that the State-owned banks finally tightened lending to the property sector with further property sale restrictions imposed thereafter.