China faces two different housing problems which, with the announcement of new government intervention, will not drag on the economy in China.
You may have noticed that China shares tumbled last Friday because of an announcement regarding new policies to cool down China’s housing market. The new rules affecting home sales include a 20% tax on gains from the sale, higher down payments, higher mortgage rates, and some talk about price targets in various cities.
There are fears that these new measures will burst the real estate bubble. However, rising housing prices have proven themselves resilient to nine government interventions during the past decade. Ghost cities, empty malls, and empty buildings are well known and documented, and yet prices keep going up as investors feed the frenzy in larger cities where demand for low- to middle-income housing is outstripping supply.
In contrast, there is a major oversupply problem in smaller cities. This tells us that the bubble appears to have already burst in the smaller cities but not in the major population centers. The government will have to deal with two opposite housing problems simultaneously and a one-size-fits-all solution will not work. I believe the government’s intervention (presented above) and its ability to mobilize capital into the smaller cities will keep this from becoming an economy-killer in China, which is good news for our economy in 2013 as well.