At home in a property bubble
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The bubble in Shanghai's property market is destined to pop; the question is how soon and what the ripple effects will be. As discussed in this column two weeks ago, it is difficult to know how many local residents have invested in the Shanghai market, or are about to. There is no data on home ownership rates as a percentage of the population, and nothing on the affordability ratio - how much of people's average monthly income goes towards a mortgage.
It is a given, however, that the rest of the country sees Shanghai as an example of how to get rich quick. Beijing royalists might scoff, and Guangdong traders might shrug. But travel around enough and you will hear a common refrain: 'We don't like Shanghainese very much, but they are the best businesspeople.' And although prices elsewhere might not be as wildly high as in Shanghai, every city is going through a similar craze: luxury homes change hands several times before completion; mortgages are obtained from banks with the flimsiest of supporting documents; and, most importantly, the market is dominated by companies with links to local officials.
So, if nothing else, it will be a destabilising blow to investor and consumer confidence across the country if Shanghai home prices start a downturn before the 2008 Beijing Olympics or the 2010 World Expo. This is particularly so now that the mainland has an almost-real property market. Undoubtedly, a much greater percentage of the population is participating today than in 1993 and 1995, when developers were playing musical chairs with empty buildings.
Indeed, in its remarkable rush towards a market-based economy, the mainland has not yet experienced a broad-based property crash - a crash that would hit the pockets of a big number of the middle class. It was only in 1998 that property transfer rights were legally established, after which the government began to give away state-owned housing en masse. Only in the past few years have consumers felt secure enough to move to more expensive homes.
In nearly every case I have encountered - in Shanghai, Beijing and Guangzhou alike - that security has bred a worrying gullibility. Every property investor or homeowner preaches the same mantra: 'The government won't let the market crash before 2008 (or 2010). We are fine.'
Tell that to the government. There is no doubt that Shanghai's is growing anxious about its visible impotency in the face of rapidly rising prices. Spokesmen are much more sincere these days in addressing reporters' questions about market-cooling measures. They have plenty to worry about. As has been the case elsewhere in Asia, particularly in Hong Kong and Taiwan, gullibility fast-tracks to rage when disappointment sets in.
There might be less to worry about if it were not for the rural element. Farmers can now sell their land-use rights and move to the city. Thinking they have escaped the persecution of corrupt local officials, they could soon find their savings wiped out in a property crash - something they were led to believe the government would never allow.
Yet it is also a paradox of life on the mainland that when the stakes are high, there is less reason to fear a disastrous outcome. The greater the threat to the state, the more effective the response will be. Masses of homeowners may get upset; but they will not be allowed to become a dispossessed, homeless, rebellious class. First, the law is on their side: bankruptcy laws are still too vague for banks to foreclose on properties. Second, the banks themselves can always just be bailed out again.
This might explain why genuine financial-sector reform is still so slow in coming.
Anthony Lawrance is the Post's special projects editor