Why a property crash could be good for China
- The wealth redistribution would benefit ordinary families, boost consumption and rebalance the economy
- China needs more sustainable economic growth and, crucially, it has the tools to minimise the short-term pain needed to achieve this
Despite property prices across China struggling to recover, the day of reckoning has yet to come for the sector. However, participants and onlookers must ask whether there is any benefit to delaying a correction.
In Shanghai, a city with a per capita gross domestic product of about US$25,000 last year, the average property price per square metre is US$18,400. In comparison, the average price in New York is just US$16,500, against a much higher GDP per capita of over US$100,000. This stark difference in housing affordability underscores the distortions and imbalances in China’s real estate market and its broader economy.
This results from the unequal distribution of income generated by GDP. Ordinary households, which should allocate most of their income to consumption rather than savings, retain too small a share of the national GDP. Meanwhile, businesses, local governments and wealthy households claim an oversized portion of GDP, leading to a significantly elevated rate of savings and investment.
When real estate prices drop, wealth is transferred from those heavily invested in the sector – such as developers, local governments and wealthy households, particularly those with multiple properties – to those less involved, namely ordinary households and the younger generation.
This occurs because, in China’s case, young people, less-affluent households and prospective first-time homebuyers would have a greater opportunity to buy property, increase their wealth and spend less income on rent.
China needs to achieve more sustainable and balanced economic growth. One could argue that a real estate crash would benefit the country by redistributing wealth from entities in the real estate sector, local governments and rich households to ordinary families, thus helping to rebalance the economy.
There would, however, be significant short-term disruptions to China’s real economy, given that its real estate sector and related activities account for a substantial portion of national GDP.
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The Chinese government possesses a broader set of tools. It can ensure that a property price drop does not result in the same level of economic pain, while still achieving income rebalancing.
Anthony William Donald Anastasi is an American PhD candidate at the School of Politics and International Relations at East China Normal University