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is nothing the communist Chinese are afraid of more than communists.
Violence, Public Anger Erupts In China As Home Prices Slide
14
April, 2018
Last
March, we discussed why
few things are as important for China's wealth effect and economy, as
its housing bubble market.
Specifically, as Deutsche Bank calculated at the time, "in 2016
the rise of property prices boosted household wealth in 37 tier 1 and
tier 2 cities by RMB24 trillion, almost twice their total
disposable income of RMB12.9 trillion." The German lender added
that this (rather fleeting) wealth effect "may be helping to
sustain consumption in China despite slowing income growth"
warning that "a decline of property price would obviously have a
large negative impact."
Naturally,
as long as the housing bubble keeps inflating and prices keep rising,
there is nothing to worry about as the population will keep spending
money buoyed by illusory wealth appreciation. It is when housing
starts to drop that Beijing begins to panic.
Fast
forward to today, when Beijing may be starting to sweat because
whereas Chinese property developers usually count on September and
October to be their “gold and silver” months for sales, this year
has turned out to be different. As the SCMP reports, not only were
sales figures grim for September, but the seven-day national holiday
last week also brought at least two "fangnao"
incidents – when
angry, and often violent, homeowners protest against price cuts
offered by developers to new buyers.
These
protests are often directed at sales offices, with varying levels of
intensity – from throwing rocks to holding banners and putting up
funeral wreaths. The risk, of course, is that as what has gone up
(wealth effect) will come down, and as home ownership has remained
the most important channel of investment for urban households in
China in the past decade, price
cuts have become increasingly unacceptable and a cause for social
unrest.
Just
last week, angry homeowners who paid full price for units at the
Xinzhou Mansion residential project in Shangrao attacked the Country
Garden sales office in eastern Jiangxi province last week, after
finding out it had offered discounts to new buyers of up to 30%.
A
similar incident took place in suburban Shanghai, where the same
developer slashed prices at another project called One Mansion by a
quarter.
While
the protests have been isolated so far, the risk is that the greater
the slide in property prices, the more widespread popular anger will
become:
"Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities.
Or
fall at all, for that matter.
While
China's stock market has had its ups and down, along the way
accompanied by various "rolling" bubbles affecting assored
Chinese assets, China’s property market has soared since the 2000s
making home ownership the quickest way to gain wealth. In Beijing,
homes that went for an average of around 4,000 yuan (US$580) per
square metre in 2003 are now above 60,000 yuan (US$8,600) a square
metre, according to property price data provider creprice.cn.
And,
in a page right out of Ben Bernanke's playbook, who in 2005
claimed that
"we've never had a decline in housing prices on a nationwide
basis" and as a result never would, what is now taking place in
China is nothing short of a shock to the general population: "People
are so used to rising prices that it never occurred to them that they
can fall too. We shouldn’t add to this illusion," Shao
said.
Meanwhile,
dreading that this moment would eventually come, the government has
been working on measures to cool property prices for years, calling
residential real estate not only an economic issue but also “an
important issue for people’s livelihoods that influences social
stability”, in a directive back in 2010.
And
while the industry remained strong in the first eight months of the
year it started slowing last month, according to data provider China
Real Estate Information Corp. Official statistics showed that in
Shangrao, where the violent protest occurred, transactions of homes
last month fell by 22% from August and 18% from the same month last
year. In Shanghai, sales in the past five weeks have risen slightly
from the same period last year, but average prices dropped in
September by over 3% from August and 1.4% from the same period last
year.
Quoted
by SCMP, Zhang Dawei, chief analyst at Centaline Property, warned
that not only were the overall sales dropping, but
poor construction quality could also be a cause for more
violence. “Try
not to buy homes built in 2018, because while the developers were
short of money, the same is the case with contractors,” he said,
and had an even more ominous warning about what's coming: "The
fourth quarter would be a peak time for residential project
completion. Issues
which used to be papered over by rising prices could erupt in this
period… so we should look out for a sudden surge [public violence]
in the coming months."
Ultimately,
it's all a question of public expectations: expectations that have
been number following years of government bailouts and bubble
reflating, making sure that every single drop in housing was promptly
offset. Hu Xingdou, a Beijing-based economist, said despite
China’s market-oriented reforms 40 years ago, investors still
lacked respect for market and social rules.
"They don’t have the spirit of contract, and they always think they can fight against the rules,” he said. “As a commodity, the value of homes can both rise and fall. Investors should obey this fundamental rule."
But
why should they if until recently, policymakers did everything in
their power to avoid them this simplest of lessons.
To
be sure, public anger at falling prices is hardly new. Rampaging
against price cuts was first seen in 2011, when homebuyers of a
residential project named Oriental Rose in Beijing’s Tongzhou
district mobbed a Huaye sales office after the firm cut prices by a
tenth.
Similar
incidents have erupted whenever investors have found their property
value depreciating. And, in a country where there are relatively
fewer investment channels and an unpredictable stock market, such
protests are always couched as a struggle to protect individual
rights. In many such cases, protesters
demand compensation or cancellation of their purchase, and in order
to prevent further social disorder, developers often accept their
demands.
In
other words, moral hazard in China is so pervasive, it threatens the
very fabric of society.
Wang
Cailiang, director of the Beijing Cailiang Law Firm, said although
fangnao was against the law, the government had tolerated such
protests because it was ultimately responsible for the surging
prices; and it is better to punt to the real estate company than
being forced to directly bailout consumers.
“It
was the government that pushed up the prices by profiting from
selling land to developers in the past two decades,” he said. “Now
public anger over home prices has become a major social issue.”
At
a meeting of the Communist Party’s Politburo in late July, top
officials reiterated that “containing home price gains” would be
a priority in the second half of the year. Of course, if home price
losses accelerate to the downside, Beijing will have no choice but to
scramble and reflate another bubble, even as the Trump administration
scrutinizes every monetary and fiscal decision by Beijing with a fine
toothed comb.
Meanwhile,
anger is only set to grow, the
only question is whether it will be a slow boil or a violent
eruption.Economist
Shao expected average home prices to drop slightly in the coming
months as the government continued efforts to control them. In
the first two weeks of September, growth was close to stagnating in
40 major cities across the mainland with the total number of new home
sales up by just 1% from the previous month, according to China Real
Estate Information Corp data.
Should
this slowdown accelerate significantly to the downside, then the
"working
class insurrection"
that China has been preparing for since 2014...
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