Tip of the hat to the FT’s Tim Harford for this — an old-school academic’s take on life inside China’s uh, keen real estate sector. Mysterious goings on inside the country’s state-owned enterprises included.
‘Evaluating Conditions in Major Chinese Housing Markets,’ an NBER paper by Jing Wu, Joseph Gyourko and Yongheng Deng, is old-school by the way because it’s focused on land supply. From the abstract (emphasis ours):
Much of the increase in prices is occurring in land values. Using data from the local land auction market in Beijing, we are able to produce a constant quality land price index for that city. Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.
And once you’ve picked your eyeballs off the floor after seeing that 800 per cent figure, do note the interesting finding about the SOEs.
In particular, the paper says that a ‘meaningful fraction’ of the rise in prices was driven by the few but huge companies backed by central government — ‘central SOEs’. And central SOEs are getting more influential in the market — see chart:
And as the paper continues, by way of explanation:
…Central SOE developers pay high prices relative to the values of nearby housing unit sales prices. That suggests these particular buyers simply pay more and that this does not merely reflect omitted quality effects. Moral hazard arising from these entities believing they are too important to fail, combined with their access to low cost capital from state-owned banks, also could help explain their bidding behavior… It remains an open question as to why central SOE developers became so much more active in housing development over the past few years.
Although the paper suggests one specific reason for central SOEs’ strong bidding — land as a direct inflation hedge. In any case, SOEs appear just as much a problem as the banks and trusts making — and securitising — real estate loans in the first place. Although the paper reminds that local governments share an interest in high land price rises — land sales are their chief source of off-budget income.
At the same time, there’s a big, uncertain macro mess behind this boom — the paper makes clear that you’d have to assess the amounts of land being made available by local governments; internal migration rates; the state of the hukou system that allots housing and services to migrants; in short, the full panoply of Chinese urbanisation.
Finally — zooming back out to the eye-popping size of this thing:
The magnitude of the increase in land values over the past 2-3 years in particular in Beijing is unprecedented to our knowledge. Not only do these increases post-date the Summer Olympics, but the recent price surges in early 2010 suggest a relationship to the Chinese stimulus package which itself is temporary. More broadly, the sharp rises in price-to-rent and price-to-income ratios since 2008 in Beijing and many of the other large coastal markets look to be very difficult to explain fundamentally.
Interesting, the paper’s authors decline to call this a bubble just yet, because of insufficient historical data on the market — competitive bids only started in 1998, actual land auctions date back to 1987. No big implosion to compare this big boom with.
Yet.
Related links:
China’s metropoli bubble fear – FT Alphaville
A quarter-century for a Beijing home – WSJ China Real-Time Report
An outspoken man in a secretive trade - Hugh Hendry in the NYT
Chinese property: less pop, more boom – FT Alphaville