Friday, December 28, 2007

Invisible Hands Now Hit China - Millions of Them!

Gao Anming writes in China Daily (here): “Property joy could be short-lived

Three years ago, one of my friends wanted to buy a second apartment. He spent three months visiting a dozen projects, and narrowed his choices to several. He was urged by the "hospitable" salespeople to hand in a down payment because prices could rise any time. “He was not moved by what he believed were sales tactics. He was wrong, and the prices did shoot up in leaps and bounds. He hesitated again and again until he dropped his plan.”

But more and more people could not afford new houses. They blamed the government and vented their anger on the Internet. For them, the iron fist the authorities have been wielding recently is most welcome. So is it time for them to celebrate?
Emotions do not beat reason. Since the days of Adam Smith, it has become increasingly accepted that supply and demand will determine prices. China has 122 million hectares of arable land, of which 120 million has been set aside strictly for farming. About 550 million people now live in urban areas. It is estimated another 600 million rural residents will enter the cities in 20 years. One does not need to be wise to envision how scarce land will be, and how expensive it will become

The local governments, despite constant rhetoric against inflating property, actually welcome the prices hikes, and have even become the invisible hands behind growing land prices, as revenue from land transfers make up a substantial proportion of their local revenues. That partly explains why prices have continued to climb despite macro-control polices in the last few years.”

I see that “the invisible hands are at work now in China (an import from US academe’s myths about Adam Smith)! This time invisible hands (note the plural – well, it is populous China) are behind ‘growing land prices’. The facts are somewhat different.

That there is a property boom in China, shared with the West, is indeed fully explained by supply and demand, which requires nothing mystical about invisible hands, spirits or disembodied body parts to add to the well-known processes in economics 101.

In Gao Anming’s article he gives a major clue to what is added to demand for property beyond the simple need to live somewhere. His friend “wanted to buy a second apartment” in addition to the one he already owned.

In short, property deeds are a financial instrument, which may benefit from rising prices in future, partly caused by the additional demand for financial instruments and partly by growing populations (of which China is well-known as a prime example: “another 600 million rural residents will enter the cities in 20 years”).

It seems to me a one-way bet in such circumstances, provided the acquisition costs are met from income and not reckless borrowing.


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