New IMF White Paper Says Talk of Housing Bubble Overblown

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Dec. 6 – A new IMF working paper titled “Are House Prices Rising Too Fast in China?” has declared that housing prices in China are not entirely out of line and fears of a housing bubble are exaggerated.

The paper, however, does indicate that certain regions have seen dramatic increases in the value of homes that are not sustainable, particularly in the luxury segment. Examples of cities where prices can be seen as out of line with fundamentals are Shanghai, Shenzhen, Beijing and Nanjing.

The most commonly cited indicator used to argue against the sustainability of housing prices is the price-to-rent ratio, which shows that the cost of purchasing a house generally outpaces the cost to rent the same home. However, the paper suggests that overall price discrepancies tend to self-correct frequently and misalignments are relatively short lived when compared to other countries with similar growth in their housing markets. Additionally, as the housing market in China is still relatively young, it is not necessarily surprising or worrisome that housing costs may be disassociated from rents. Without a larger amount of time for analysis, the price-to-rent ratio is not a reliable tool.

“Overall…while prices have run ahead of fundamentals in some market segments, nationally this does not seem to be the case,” the researchers stated in the report.

The policies that the Chinese government have taken to cool growth in the real estate market do appear to have had a meaningful impact and the gaps between fundamentals and implied prices have shrunk in some cities, with the exception of the more affluent coastal cities.

The paper suggests that the government take further action to ensure that the market corrections are lasting and not simply a transient phase. To fully augment the underlying structural causes of real-estate inflation, the government should continue to increase interest rates, increase the carrying cost of home-ownership through a significant property tax, and further develop the financial markets as an alternative to real estate speculation.

The researchers make sure to note that while they do not see evidence of significant and broad-based overvaluation in property prices today, it may take time for the imbalances to be clearly revealed and the government must be proactive and not merely react to rising prices.