Discussion: Understanding the Real Estate Market in China Anna Wong Federal Reserve Board of Governors HKMA/PBoC/DRC Conference: China s Real Estate Market and Implications and Economic and Financial Stability January 18-19, 2018. Disclaimer: The views expressed here are solely those of the author and do not necessarily reflect those of the Board of Governors of the Federal Reserve System.
Questions What are some key features of China s housing market? What are the primary drivers of the rapid house price appreciation in China? What policies can lead to a more sustainable pace of house price growth?
Key features of China s Housing Market Rapid price appreciation over the years, driven by land prices, significantly higher than other countries (Deng) Heterogeneous situations across Chinese cities (All) Demand outstripped supply in Tier-1 and some Tier-2 cities Excess supply and inventory built up in lower-tier cities As a result: coexistence between rapid price increase and high inventory High house price to income level ratio Evolving role of housing in economy: rising real estate consumption of services as a share of GDP over the years (Liu)
What are the drivers of rapid house price appreciation in China? Supply: Role of local government Local governments have monopoly over local land market, monopolistic competition market structure in residential housing market Local governments with more reliance on land sales higher supply elasticity Inefficient land allocations in highly demanded cities Demand: Lack of alternative investment instruments Low holding costs for real estate ownership and under-developed rental market Urbanization and fast population growth in some cities High income growth Cultural pressure to be house owner
Policy Prescription Supply: Break the supply monopoly of land and housing by local governments Implement property tax Higher floor area ratio, construct multi-unit buidings Less land allocation to agriculture in highly demanded cities Expand secondary real estate market Demand: Continued macroprudentialpolicies, i.e. tax on short-term holders, introduce holding costs Introduce public affordable housing Develop rental market and equalize incentives to rent vs. buy Introduce alternative investment instruments, i.e. REIT/ABS Population control in 1 st tiered cities
Contributions Lots of insights into the structural issues in China s housing market Contribute to understanding in whether the rise in China s housing prices is a bubble Offers a glimpse of latest policy thinking post 19 th party congress Cross-country comparisons to China s housing market
Comments 1. Emphasis on the role of structural explanations. What about cyclical drivers of the housing market? 2. How effective are macro prudential policies in controlling housing price appreciation? What role for monetary policy? 3. Role of capital account management?
Cyclical Drivers Housing is the business cycle. -Ed Leamer(2007, Jackson Hole) Residential Property Prices (Dec2010=100) Percent 25 Index: Dec2010=100 190 20 15 10 Monthly percent change, annual rate Tier 1 Cities 180 170 160 150 5 140 0-5 -10 Tier 2 Cities Tier 3 Cities 130 120 110 100-15 90 201012 201103 201106 201109 201112 201203 201206 201209 201212 201303 201306 201309 201312 201403 201406 201409 201412 201503 201506 201509 201512 201603 201606 201609 201612 201703 201706 201709
HP-Filtered -.1 -.05 0.05.1 2010m1 2012m1 2014m1 2016m1 2018m1 t ln_tier1 cyclical component from hp filterln_tier2 cyclical component from hp filter ln_tier3 cyclical component from hp filter
Current cycle: destocking after an extended period of excess inventories across all tiers of cities Aggregate (40 cities) Residential Floor Space Construction Starts versus Sales 600000 12-month rolling sum Starts Sold 550000 500000 450000 400000 350000 300000 250000 200000 200901 200903 200905 200907 200909 200911 201001 201003 201005 201007 201009 201011 201101 201103 201105 201107 201109 201111 201201 201203 201205 201207 201209 201211 201301 201303 201305 201307 201309 201311 201401 201403 201405 201407 201409 201411 201501 201503 201505 201507 201509 201511 201601 201603 201605 201607 201609 201611 201701 201703 201705 201707 201709 201711 Thousands of Squared Meters Month
Mortgage credit growth rose rapidly in current cycle 35 30 Medium & Long-term Loans to Household, yoy chg % (SA) Medium+LT Loans to Household, yoy % chg (LHS) 6.5 6.0 5.5 25 5.0 4.5 20 4.0 3.5 15 Real Lending Rate, % (RHS) 3.0 2.5 10 201101 201104 201107 201110 201201 201204 201207 201210 201301 201304 201307 201310 201401 201404 201407 201410 201501 201504 201507 201510 201601 201604 201607 201610 201701 201704 201707 201710 2.0
Transmission of monetary policy via mortgage credit
Does co-existence of rapid house price appreciation and high inventory in some cities means that monetary factor not a key cause of current cycle? (Hu) Even if size of monetary shock is same across cities, prices would rise more in more supply inelastic cities. Overall user cost of capital also fell more in higher-tiered cities due to higher increase in expected house appreciation Shadow cost of home-owning = borrowing cost + opportunity cost +depreciation/ maintaneance cost - expected return Increases more for cities with more inelastic supply larger demand shift in higher-tiered cities
Levelof excess inventory is always higher in lower tier cities, but a positive monetary shock should cause excess inventory in both cities to move toward the same direction: Synchronized destocking across tiers of cities 1 Residential Floor Space Starts - Sales (12m sum yoy%) 0.8 Tier 1 Tier 2 Tier 3 0.6 Difference in 12-month growth rates of Sales versus Starts 0.4 0.2 0-0.2-0.4-0.6-0.8-1 200801 200803 200805 200807 200809 200811 200901 200903 200905 200907 200909 200911 201001 201003 201005 201007 201009 201011 201101 201103 201105 201107 201109 201111 201201 201203 201205 201207 201209 201211 201301 201303 201305 201307 201309 201311 201401 201403 201405 201407 201409 201411 201501 201503 201505 201507 201509 201511 201601 201603 201605 201607 201609 201611 201701 201703 201705 201707 201709 201711 Month
Bottomline Chinese cities are heterogeneous and have unique features But not an exception to the common experience from the rest of the world: monetary policy matters Ahearneet al (2005): finds that house price booms are typically preceded by a period of easing monetary policy across 18 major industrial countries since 1970. IMF Global Housing Report (2016, 2017): credit has grown faster and monetary policy looser in countries experiencing housing boom since the GFC Recent example: Germany no exception Liu used Germany as an example of stable housing prices and insensitivity to monetary policy. Sample ends in 2012. House prices in major cities took off since.
Evidence of macro prudential policies in controlling house price appreciation? What role for monetary policy? Macro-prudential policies proven effective in controlling leverage and reducing financial stability risks Intended to address externalities and market failures associated with activities of financial intermediaries and markets that may lead to excessive pro-cyclicality and build up of systemic risk (Claessens, 2015) Mixed evidence with regard to effectiveness of controlling housing price appreciation Deng showed data of macro-prudential policies in Beijing only short-term impact Hong Kong BIS study (Kuttnerand Shim, 2013), 57 countries over three decades. Among 9 non-interest rate policy tools aimed at stabilizing house prices and credit, onlya change in housing-related taxes have a discernible impact on house price appreciation Monetary polices too blunt of an instrument to use for housing prices. (Bernanke, 2010) For macroprudentialpolicies to be most effective, monetary policy should complement (Bruno, Shim, Shin, 2015)
Role of capital account management Lack of alternative forms of investment vehicles for high savings Alternative assets (2009-2017): deposit rates (about 5%), equity returns (2%), buying house in Los Angeles (plus FX return): 7% Tightening of capital controls since late 2016 In 2017, net private outflows decreased by almost $600 billion (5% of GDP!)
Capital controls tend to affect outflows from Chinese cities with higher house prices ln(views of properties abroad) 0 5 10 15 Nanjing Jinan Chengdu ZhengzhouShenyang Hefei Wuhan Xian Hangzhou Nanchang Chongqing Changchun Harbin Ningbo Nanning Kunming Lanzhou Taiyuan Jinhua Taizhou Chaohu Qingdao Wuxi Foshan Huzhou Dalian Chaoyang Yinchuan Langfang Wuhu Xining Baoding Suzhou Lishui Zibo Qinhuangdao Sanming Sanya Liaoyang Nanchong Shijiazhuang Zhuhai Puyang DaqingChangzhou Nantong Putian Binzhou Yichang Guilin Yangzhou Huizhou Jining Liaocheng Chenzhou Hengshui Heze Neijiang Nanyang Huainan Maanshan Jiaozuo Fuyang Shaoguan Jinzhou Liuzhou Beijing Guangzhou Tianjin Shenzhen Xiamen Wenzhou 7 8 9 10 ln(price/sq meter at home) Source: Converse and Wong (forthcoming)
Capital controls likely amplified domestic house demand in the current cycle Housing Prices vs. Net Capital Outflows, 2012-2017 Several studies have found that capital flows more important in accounting for real estate valuation than other the real interest rate and inflation. (Aizenman, Jinjarak, 2011; Bernanke, 2010; Gete, 2015)
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