Monday, March 31, 2008
Here's an interesting news report quoting People's Bank of China official Zhang Tao as saying that housing prices in China are, relative to both income and rental prices, disproportionately high compared with the ratio in other countries. Zhang attributes this among other things to the (presumably disproportionate) desire of people to buy instead of rent, and in particular to buy a new residence. (This latter point squares with my own experience talking to Chinese acquaintances. Although people feel richer when housing prices go up after they buy, the increased wealth may be an illusion; the prices people see are for new housing, whereas there seems to be a very significant discount for "used" housing.)
What's interesting are the remedies Zhang proposes: essentially, to make it easier to buy through such mechanisms as government-guaranteed mortgages or direct aid to low-income buyers. Surely these remedies would have exactly the opposite effect: by making buying easier relative to renting, as well as easier for any given level of income, they would exacerbate the disproportionality of housing prices relative to rents and income levels. I'm no economist, but if one wants to narrow the gap, isn't the solution to make renting more attractive and buying less attractive? Rent subsidies, for example, would both decrease the price of bought housing by reducing demand and increase the general level of rents by giving renters more resources. (The slope of the supply and demand curves for rental housing would determine how the subsidy ended up being shared between landlords and tenants.)
What the disproportionality (if true) suggests to me is that housing prices are in a bubble, and indeed we are already beginning to see signs of softness in the housing market. If incomes in China have historically supported a particular ratio between rental and purchase prices, then it makes sense to think (absent particular reasons to think the contrary) that disproportionality will eventually be brought back into line.