CCTV: Price Targets For Real Estate

This morning I was on CCTV News BizAsia talking about China’s real estate market, in particular the targets cities across China have been asked to set on property price increases this year. 

Shanghai has pledged to keep real estate prices from rising faster than the target GDP growth rate (8%), while other cities are targeting price rises of 10-15%.You can watch the interview in a short clip here.  I discuss whether the benchmarks that are being used make sense (they don’t) and whether the targets will have much of a market impact (they won’t).

To be blunt, I see these pricing targets as something of a sideshow. First of all, does anyone truly believe that there is a single city in China that actually wants to rein in the real estate boom? Land sales are a critical source of local government revenue, and continued construction is vital to hitting their GDP targets.  Clearly they don’t want to rein it in, which is reflected in the rather generous pricing targets (Can anyone actually imagine property prices going down? Apparently not.) 

Second, supposing price controls were actually enforced, they would do nothing to change the market distortions that cause so much money to flow into real estate, and unproductive real estate in particular.  The solution to that is either (a) rein in the money supply that is inundating the market with cash, or (b) give people somewhere else to put the cash besides real estate (over the long term by developing domestic capital markets, but immediately by opening up the capital account to allow Chinese to invest overseas). 

These are steps that can only be taken at the national level, and only by taking on deeply entrenched local interests that have no desire to see this party come to an end anytime soon.

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