Busting the myth of China’s property bubble

Is China's market as precarious as it seems? Image: Getty.

Five years on, the US economy remains sluggish after the bursting of a house price bubble. More recently, the focus has been on China, the world’s second largest economy, and whether it too might be overwhelmed by a similar event.

Reports of “ghost cities” and some property developers facing bankruptcy have become commonplace. Some commentators have asserted that the bubble may have already “popped”.

The stakes are high. The IMF notes that since 2007, China has contributed more – much more in fact – to world growth than any other country, and this is projected to remain the case into the foreseeable future. Given that China’s construction sector is a significant source of demand for our natural resources, Australia has more to lose than most if the economy there sours.

Before commenting on the Chinese case, it is worth briefly reviewing the chain of causality in the US. From 1997, house prices in the US began to appreciate. During the 2000s, the market became increasingly infected by debt funded speculators betting on continued capital gains. In the process, banks lent money to borrowers of marginal credit worthiness requiring little or no collateral. When prices stalled and then went into sharp reverse in 2006, the banks were left holding the bag, ultimately requiring a bail out by taxpayers. Banks (and firms and households) then spent the next few years seeking to rebuild their balance sheets, as opposed to extending new loans, and this process continues today.

The above story breaks down at several points when it comes to China. What is true is that house prices in China have increased rapidly during the 2000s. That, however, is about where the similarities end.

Firstly, while recent headlines have reported that house prices in China have fallen for a fifth straight month, what we have actually seen is a levelling off in prices.

According to official data, prices nation-wide remain steady compared with a year ago and remain marginally up since 2010. Unofficial data points to stronger price growth since 2010.

Examples of more significant price declines in certain cities can be found, as they can in particular developments in a given city. But to tell a macroeconomic story based on these is to miss the forest for the trees.

To put the above numbers in perspective, last year house prices fell more in Australia than they did in China.

Secondly, there is little evidence that any deterioration in the housing market has infected the banking system. Given that nation-wide house prices have not in fact declined, this is perhaps not surprising.

Apartment models on display at a real estate fair in Yichang, Hubei province. Image: Getty. 

There are other reasons as well. One is simply that Chinese are much more likely to fund home purchases from savings, often calling upon the assistance of family members in the process. In part this reflects cultural differences, but also strict down payment requirements imposed on borrowers by banks.

Thirdly, it should not be forgotten that the key institutions in China’s banking system remain more or less government-owned. This changes the rules of the game considerably. Standard risk management variables, such as the capital adequacy ratio – which, incidentally, is extremely high amongst Chinese banks – and the non-performing loan ratio, are only of marginal relevance because the integrity of the biggest banks is guaranteed by the government. China’s central government is willing and able to act on that guarantee. The level of public debt outstanding is modest and even when contingent liabilities are taken into account, such as debt racked upon by local governments, the prospect of China falling victim to a European style public debt crisis is remote.

Another example is that amid a deteriorating macroeconomic environment in which privately owned banks might elect to slow credit growth, the Chinese government can instruct banks to do the opposite, as was seen in 2009. This remains within the capability of the banks given the extremely high reserve requirements they maintain).

Fourthly, in addition to continuing government ownership, there is also the fact that the banking system remains heavily regulated. For example, by fixing interest rates, the government can act to boost the margins and profits of the banks. This may be a negative from an efficiency perspective, but nonetheless can act to promote the stability of the system.

Property prices in China may well be inflated. Price to income ratios, particularly in the major cities, suggest that they are. However, for high prices to constitute a bubble, they must be able to burst. In the case of China, it is not clear that they have, nor where a trigger might come from.

More likely is that we are set to see a period of no or low price growth, rather than sharp declines. Of course, even stagnant house prices have implications for China’s overall rate of growth and therefore the demand for Australian natural resources. But as China’s premier, Wen Jiabao, recently noted, the days of average annual growth rates in excess of 10 per cent are over. 

The Conversation

This article was originally published on The Conversation. Read the original article.

James Laurenceson is a Senior Lecturer in Economics at The University of Queensland.


Urgently needed: Timely, more detailed standardized data on US evictions

Graffiti asking for rent forgiveness is seen on a wall on La Brea Ave amid the Covid-19 pandemic in Los Angeles, California. (Valerie Macon/AFP via Getty Images)

Last week the Eviction Lab, a team of eviction and housing policy researchers at Princeton University, released a new dashboard that provides timely, city-level US eviction data for use in monitoring eviction spikes and other trends as Covid restrictions ease. 

In 2018, Eviction Lab released the first national database of evictions in the US. The nationwide data are granular, going down to the level of a few city blocks in some places, but lagged by several years, so their use is more geared toward understanding the scope of the problem across the US, rather than making timely decisions to help city residents now. 

Eviction Lab’s new Eviction Tracking System, however, provides weekly updates on evictions by city and compares them to baseline data from past years. The researchers hope that the timeliness of this new data will allow for quicker action in the event that the US begins to see a wave of evictions once Covid eviction moratoriums are phased out.

But, due to a lack of standardization in eviction filings across the US, the Eviction Tracking System is currently available for only 11 cities, leaving many more places facing a high risk of eviction spikes out of the loop.

Each city included in the Eviction Tracking System shows rolling weekly and monthly eviction filing counts. A percent change is calculated by comparing current eviction filings to baseline eviction filings for a quick look at whether a city might be experiencing an uptick.

Timely US eviction data for a handful of cities is now available from the Eviction Lab. (Courtesy Eviction Lab)

The tracking system also provides a more detailed report on each city’s Covid eviction moratorium efforts and more granular geographic and demographic information on the city’s evictions.

Click to the above image to see a city-level eviction map, in this case for Pittsburgh. (Courtesy Eviction Lab)

As part of their Covid Resource, the Eviction Lab together with Columbia Law School professor Emily Benfer also compiled a scorecard for each US state that ranks Covid-related tenant protection measures. A total of 15 of the 50 US states plus Washington DC received a score of zero because those states provided little if any protections.

CityMetric talked with Peter Hepburn, an assistant professor at Rutgers who just finished a two-year postdoc at the Eviction Lab, and Jeff Reichman, principal at the data science research firm January Advisors, about the struggles involved in collecting and analysing eviction data across the US.

Perhaps the most notable hurdle both researchers addressed is that there’s no standardized reporting of evictions across jurisdictions. Most evictions are reported to county-level governments, however what “reporting” means differs among and even within each county. 

In Texas, evictions go through the Justice of the Peace Courts. In Virginia they’re processed by General District Courts. Judges in Milwaukee are sealing more eviction case documents that come through their courtroom. In Austin, Pittsburgh and Richmond, eviction addresses aren’t available online but ZIP codes are. In Denver you have to pay about $7 to access a single eviction filing. In Alabama*, it’s $10 per eviction filing. 

Once the filings are acquired, the next barrier is normalizing them. While some jurisdictions share reporting systems, many have different fields and formats. Some are digital, but many are images of text or handwritten documents that require optical character recognition programs and natural language processors in order to translate them into data. That, or the filings would have to be processed by hand. 

“There's not enough interns in the world to do that work,” says Hepburn.

Aggregating data from all of these sources and normalizing them requires knowledge of the nuances in each jurisdiction. “It would be nice if, for every region, we were looking for the exact same things,” says Reichman. “Instead, depending on the vendor that they use, and depending on how the data is made available, it's a puzzle for each one.”

In December of 2019, US Senators Michael Bennet of Colorado and Rob Portman of Ohio introduced a bill that would set up state and local grants aimed at reducing low-income evictions. Included in the bill is a measure to enhance data collection. Hepburn is hopeful that the bill could one day mean an easier job for those trying to analyse eviction data.

That said, Hepburn and Reichman caution against the public release of granular eviction data. 

“In a lot of cases, what this gets used for is for tenant screening services,” says Hepburn. “There are companies that go and collect these data and make them available to landlords to try to check and see if their potential tenants have been previously evicted, or even just filed against for eviction, without any sort of judgement.”

According to research by Eviction Lab principal Matthew Desmond and Tracey Shollenberger, who is now vice president of science at Harvard’s Center for Policing Equity, residents who have been evicted or even just filed against for eviction often have a much harder time finding equal-quality housing in the future. That coupled with evidence that evictions affect minority populations at disproportionate rates can lead to widening racial and economic gaps in neighborhoods.

While opening up raw data on evictions to the public would not be the best option, making timely, granular data available to researchers and government officials can improve the system’s ability to respond to potential eviction crises.

Data on current and historical evictions can help city officials spot trends in who is getting evicted and who is doing the evicting. It can help inform new housing policy and reform old housing policies that may put more vulnerable citizens at undue risk.

Hepburn says that the Eviction Lab is currently working, in part with the ACLU, on research that shows the extent to which Black renters are disproportionately affected by the eviction crisis.

More broadly, says Hepburn, better data can help provide some oversight for a system which is largely unregulated.

“It's the Wild West, right? There's no right to representation. Defendants have no right to counsel. They're on their own here,” says Hepburn. “I mean, this is people losing their homes, and they're being processed in bulk very quickly by the system that has very little oversight, and that we know very little about.”

A 2018 report by the Philadelphia Mayor’s Taskforce on Eviction Prevention and Response found that of Philadelphia’s 22,500 eviction cases in 2016, tenants had legal representation in only 9% of them.

Included in Hepburn’s eviction data wishlist is an additional ask, something that is rarely included in any of the filings that the Eviction Lab and January Advisors have been poring over for years. He wants to know the relationship between money owed and monthly rent.

“At the individual level, if you were found to owe $1,500, was that on an apartment that's $1,500 a month? Or was it an apartment that's $500 a month? Because that makes a big difference in the story you're telling about the nature of the crisis, right? If you're letting somebody get three months behind that's different than evicting them immediately once they fall behind,” Hepburn says.

Now that the Eviction Tracking System has been out for a week, Hepburn says one of the next steps is to start reaching out to state and local governments to see if they can garner interest in the project. While he’s not ready to name any names just yet, he says that they’re already involved in talks with some interested parties.

*Correction: This story initially misidentified a jurisdiction that charges $10 to access an eviction filing. It is the state of Alabama, not the city of Atlanta. Also, at the time of publication, Peter Hepburn was an assistant professor at Rutgers, not an associate professor.

Alexandra Kanik is a data reporter at CityMetric.