Of Buildings and Real-Estate

Construction, real-estate, and housing are on my mind this week.

First, Beijing’s real-estate prices have been dropping steadily in recent months. This week many papers are carrying stories about bored and out of work real-estate agents as well as sob stories about couples who saved for years to buy a house only to see its value fall precipitously right after the fulfillment of their dreams.

This is big news because housing prices have become a common gripe in recent years. There have also been fears of a bubble. I’m not enough of an economist to know what this represents, exactly, but I will provide a little background. First, there are several unique circumstances beyond typical supply and demand that help explain China’s high housing prices.

On a fundamental level, China’s exchange rate policy acts to keep Chinese investment in China. Because the yuan is undervalued, anyone who has a lot of yuan to invest will have less buying power if invest overseas, providing a big incentive to invest in China. Add to that loose lending standards forced on state-run banks to keep the economy flowing in the wake of the financial crisis and you have a lot of cheap, available money for real-estate investment.

Then there’s the distorting effect of government control of land markets. Local governments have an incentive to limit the availability of land for development because they control the supply and get the profits. Local governments receive little funding from the central government; they are responsible for raising their own funds. They can levy taxes or, in what has become one of the biggest sources of local government income, coordinate land deals.

This week’s news is the first sign of lower prices despite some high profile efforts by the central government earlier this year, including limiting the number of houses each person can buy. The government also committed to building a millions of affordable housing units in the next few years. The moral of this story: high housing prices are a big social concern here and something might be rocking the boat.

There are plenty of intriguing social phenomena that flow out of this strange housing situation. One is the prevalence of personal glorification projects. For example, the tallest building in China was just completed, not it Beijing, Shanghai, Guangzhou, or any other major cities, but in the township of Huaxi. The town turned itself into an amazingly successful manufacturing center in the last ten years and provides houses and cars for all its residents. The new high-rise is the pet project of the town’s leader.

Huaxi is the iconic example, but extravagant public building projects are commonplace, and they’ve become symbols of government mismanagement. One social activist has made his name travelling around the country taking pictures of local government headquarters, and the pictures are well worth a look (Shanghaiist).

Another interesting photo project I ran across recently is a collection of tiny living quarters in Beijing. Many of these small apartments are big enough for a bed and little else. They’re also commonly crowded into basements and the bomb-shelter/tunnel system built back in the 50s.

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