THE SOAP OPERA OF CHINA´S HOUSING BOOM / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( HIGHLY RECOMMENDED READING )

The soap opera of China’s housing boom

By Geoff Dyer

Published: January 6 2010 20:05

The most talked-about television programme in China at the moment is a soap opera called Snail House, which offers the viewer sex, corruption and political intrigue. Really, however, it is all about house prices.

One character becomes the mistress of a party official to help her buy a flat, while another young couple struggles unsuccessfully to raise the deposit for an apartment in a city that looks suspiciously like Shanghai. The series struck such a raw nerve that the censors took it off the air at the end of last year, although that has not stopped it becoming a big online hit.

The success of Snail House says something important about the popular mood in China today. While much of the rest of the world is in awe of China’s rapid recovery, the programme tapped into the mounting wave of unease about the sky-rocketing cost of apartments in many cities. Urban Chinese complain loudly about becoming “mortgage slaves”.

The house-price angst is fuelling fears among investors that China’s super-charged lending boom last year is stoking a real estate bubble that will eventually burst and derail the economy.

Indeed, there is a whiff of Dubai about the Chinese property market at the moment. In Tianjin, a city two hours from Beijing, a developer is starting work on a vast project of luxury villas, built in clusters named after continents, which form the shape of a world map. If that does not sound familiar, nothing screams Dubai more than the 7-star hotel and indoor ski slope that are also part of the plans. (In defence of the skiing, it was -11°C in Tianjin on Wednesday, compared to Dubai’s 23°C.)

There are plenty of alarming statistics to back up the anecdotes. According to Knight Frank, average prices for new homes in the year to November rose by 68 per cent in Shanghai, 66 per cent in Beijing and 51 per cent in Shenzhen. The China Daily noted this week that in terms of house prices as a proportion of incomes, China is now the most expensive place in the world.

That said, anyone predicting problems in Chinese property needs to consider some pretty strong fundamentals underpinning the market. In recent years, incomes have mostly risen faster than house prices, and homeowner debt levels are low.

Then there is urbanisation. According to the State Council, as many as 400m people could move to cities over the next two decades – which works out, by the way, at 322 Dubais. It is hard to lose too much sleep, say the optimists, about a collapse in a property market facing that sort of potential demand.

But there is one factor that makes even property bulls pause for thought: the acres of empty flats in high-end compounds in many Chinese cities. Patrick Chovanec, an economist at Tsinghua University in Beijing, who bought an apartment in a new complex that was sold out but mostly empty, calls them “ghost-condos”. In the Pudong area of Shanghai in the evening there are whole blocks with almost no lights on. By one estimate, 587m sq m of apartments have been left empty by owners.

The reason, says Mr Chovanec, is that Chinese treat flats as “stores of value, like gold”. With few other investment options in a closed economy, they put a big chunk of savings into real estate. And it is this behaviour that is driving up house prices in plenty of cities and, if unchecked, could create a nasty bubble.

China needs not only to rebalance its economy, it also needs to rebalance its housing market, changing the incentives so that the investment goes into much-needed low-income housing and not to high-end flats that are unused. But this is where the politics get difficult.

The obvious solution is a property tax. Chinese pay a one-off transaction tax when they buy a house but nothing afterwards. With an annual tax, it would make less sense to keep empty properties. The juicy margins that developers get from top-end flats would be squeezed, forcing them to build other types of property.

Indeed, plenty of Chinese economists see a property tax as a silver bullet to alter some of worst aspects of China’s increasingly unequal economy. It could create a sustainable source of income for local governments, which often rely on the one-off revenues from selling land they have taken from farmers. And it could provide a way to finance reforms of the household registration system, which denies health and education services to migrant workers in cities.

But while China has talked about a property tax for years, it has never been implemented. Some of the most powerful vested interests in China today are the tight webs of property developers and local government officials who both benefit from the current opaque set-up; Snail House had a lot to say about the corruption in some of these connections. A property tax would also shift the relationship between governed and government in a way that Beijing might find alarming – the only thing more middle-class than owning property is complaining about how local authorities spend tax revenues.

There is also the problem of implementation. A property tax might help to avoid a bigger bubble down the road, but if badly handled it could cause the market to slump. Helped by buoyant housing, Beijing has engineered a rapid economic recovery, but to sustain the rebound this year it faces some delicate political choices.

The writer is the FT’s China bureau chief

Copyright The Financial Times Limited 2010