Get Ready for Soaring House Prices

飞雪寒冰

Fiscal stimulus only works in the short term, he reiterated, adding that the government should remove barriers for private enterprises in production and encourage private investment.

He admitted that it is more difficult to boost domestic market demand than overseas market need.

"Foreign markets are already there, but a domestic market still needs to be fostered, which calls for more active participation of private enterprises. A systematic change is needed to increase production and expand the domestic market," he said.

飞雪寒冰

It may be problematic to predict price changes for houses and land over a short term according to the money supply, since there are many other variables. But money supply functions as the most important variable when it comes to the medium- or long-term, as Freedman has told us.

What is money supply? Cash in circulation plus bank savings. Doesn't it equal purchasing power or paying capacity? Money supply depends on demand for money, or the two interact as both cause and effect. Therefore, changes in money supply reflect changes in demand for money, which includes the money demand in the real economy, stock market and other areas, as well as speculative demand. In most cases, money supply goes along with the condition of real economy. However, it is often ignored.

Since 1985, the broad money supply in China has increased by a compound growth rate of up to 22 percent. Now, due to industrial overcapacity and infinite capacity for expansion, prices for ordinary industrial products lag behind the overall inflation rate. The winners are agricultural and mineral commodities, energy, infrastructure, marketing channels, golf courses, forestry, land, water, fresh air, etc.

飞雪寒冰

Admittedly, there are many empty houses in Chinese cities, and house prices have exceeded incomes. But these two factors should not prevent house prices from soaring. Neither should government policies and various taxes, such as the value-added tax on land, transaction tax, property tax, etc., prevent higher prices. Many people blame developers, market speculators and collusion between officials and merchants for this phenomenon. But they are wrong.

In China, there's structural overcapacity in the housing sector. This reflects problems with building quality, services, transportation, and imbalances in distribution, rather than overall overcapacity.

My two-part conclusion: Because of the weak economy and the high rate of unemployment, I believe fiscal and monetary policies will remain lax over the next three to five years; that is, money supply will continue to increase by a double-digit compound rate (currently it's around 20 percent). And because of this, house prices will continue to grow quickly. Moreover, low interest rates will contribute to this trend.
　　
In addition, down payment ratios in China will shift from the current 20 to 30 percent to 5 to 10 percent, as we see in western countries. House prices in China are high compared with incomes, but if we take personal savings into consideration, these prices are not so unacceptable. In five to 10 years, prices of luxury houses in Beijing and Shanghai will probably exceed absolute prices of those in Hong Kong. Yes, they will.

飞雪寒冰

Currently, the fast growth of money supply will accompany fast growth of nominal incomes, especially at state-owned enterprises, monopoly industries, and government departments. That's what has happened over the past 30 years. So we should not compare current incomes with high house prices in the future, but compare high incomes in the future with high house prices in the future. Of course, income distribution imbalances will be more serious.                                                                  
　　
Some people have asked whether the central bank will excessively tighten monetary policy and thus cause declines in house and land prices. It's possible, but the weak economy and high rate of unemployment will restrain fiscal and monetary policies. The current financial crisis has fostered images of the central bank in each country as a policeman wielding a gun and shouting, "Get back, or I'll shoot." If people ignore him and kept moving forward, he may have no choice but to step back and finally drop the gun.

Look at central banks in all the western countries. They threw centuries-old doctrines about inflation, independence and the inefficiency of state-owned enterprises out the window as soon as the financial tsunami hit.

This article represents the author's personal viewpoint.