Will the House Prices Fall in 2014?
To speak frankly, firstly, house prices have big probability of rapid decline; secondly, a new round of house prices rise are being brewed in megacities.
Why I say “the probability for rapid house price decline is not small”?
For the house price trend in 2014, the decisive factors are external shocks from the financial market instead of changes of the basic supply-demand relationship.
In 2014, the financial market will suffer a series of internal and external shocks. As external shocks, the biggest possibility is from that the Federal Reserve quits QE. This will become the main switch that induces the whole shocks, and it will reverse the flow directions of the global fund allocation: A large amount of interest arbitrage funds flushing from the U.S. to the world will turn around and flow back into the U.S.
Then, some of these hot moneys that flowed into China and have invested in interest arbitrage assets (among them, the biggest part is real estate) through various shadow banking with the amount as high as trillions will strive to be the first to quit, thus the asset market will hit by a wave of huge shock, while the real estate market will bear heavy pressures.
Even worse, the fleeing of hot moneys is very much likely to trigger the falling down of a series of dominoes. Because a large amount of assets (enterprise departments and resident departments) have been closely connected with real estate obviously or secretly, the real estate is the mortgage collateral for these assets to gain credits and loans. When the real estate prices are falling by the first shock of “QE quits”, the pressure of adding collaterals will force the risk assets that are mostly weak and the cash flow relies on refinancing enter into clearing. As a result, the whole credit market will suck into successive credit crunches, and the selling off with decrease in value has to be carried out for relevant secured assets again and again. Eventually, the whole collateral department will experience a brutal decline in asset values.
Fortunately, we have a central bank with financial-risk-dealing experience and a relatively healthy state balance sheet. Then, a shock is not easy to evolve into a crisis, and a shock will just be a shock.
Then turns to my second judgment: After external shocks, a new round of house prices rise are being brewed in megacities.
Why? The key is “great immigrants.” Facing the potential ten-million investment immigrants, demand will exceed supply in Shanghai’s real estate market and such supply-demand relationship is hard to be changed.
In the future 10 years, in China’s third-tier and under third-tier cities, the middle class with more than 300 million people, nearly 200 million rich and very rich population, and more than 100 million extremely rich people will be newly increased. To such huge group, their consumption upgrading and assets reallocation need to rely on the megacities to realize.
For investment immigrants coming from the third-tier cities, big cities like Shanghai mean the word of “upgrading.” Such upgrading is embodied in the advanced infrastructures (roads, transportation, water, electricity and gas etc.) and the advanced service provision (medical treatment, education and cultural life etc.), higher capital stock per capita, and gross human capital with higher quality etc. owned by cities, and the “urban vitality” with continuous creation.
In the economics, what is correspondent to “vitality” is TFP, i.e. total factor productivity. Such TFP is the internal motivation for growth, and it determines the growth speed and return for investments.
What’s the relationship between TFP and house prices? In a sense, the house prices can be regarded as the proxy variable for TFP, and there is a positive correlation between them. In other words, the higher TFP in certain area, the higher house prices are in such area. On the contrary, if TFP in certain area is rather low, but the house prices are rather high, then there are bubbles containing in the house prices.
Viewing Shanghai as an example, it is entering a new round of development cycle that is promoted by the third-tier great immigrants, and the corresponding TFP is not only far higher than the average level of the whole country, but also is far higher than the neighboring sub-center cities. This means that Shanghai has the potential investment growth speed and investment return that are far higher than the average level of the whole country. Then it is reflected in Shanghai’s rising house prices.
The third-tier investment immigrant tide has pushed the TFP in Shanghai to get higher and higher, and Shanghai’s TFP that is maintained at a high level also has attracted more third-tier investment immigrants. The two factors mutually depend on and enhance each other. Such “positive feedback between the third-tier great immigrants and TFP” has constituted the solid foundation of house prices in Shanghai, and it is the fundamental incentive for Shanghai’s real estate market to constantly create new peaks.
In those years, Hong Kong once had the highest TFP among East Asia economies for as long as 15 years. Then, I’m rather optimistic about the future of Shanghai as the upgrading version of Hong Kong.
Published on Southern Weekly | 2014-1-2
