China Faces Another Real Estate Bubble – Warned of Divorce Loophole Spillover Effects of Loose U.S. Monetary Policy

The real estate market is proving to be a resilient market as the CCP virus (Wuhan pneumonia) pandemic ravages the world in 2020.

The Chinese real estate market has been particularly affected by high housing prices and hot sales. After an initial brief pause due to the CCP virus pandemic, real estate sales exceeded US$2.6 trillion last year, according to official data from the National Bureau of Statistics of the Communist Party of China.

This trend was encouraged by the CCP’s loose monetary policy that was in place for years prior to the plague. Although the CCP government was more conservative than the U.S. in its stimulus programs during the Epidemic, nominally the Chinese economy appears to have rebounded from the crisis in good health.

The resulting spike in housing prices has increasingly raised public concerns about a massive real estate bubble, especially in first-tier cities such as Shanghai, Beijing and Guangzhou.

What needs to be clear is that the problem of an overheated market is mainly found in first- or second-tier cities, and in areas close to high-quality schools and good transportation. Elsewhere in China, there are large swaths of houses and apartments vacant in cities below the second and third tier, in rural areas, and in certain cities in the northeast.

The real estate bubble has also led to a surge in debt for consumers and real estate developers. By the end of 2020, China’s total debt reaches 350% of GDP.

In many ways, China’s real estate market is a product of the Chinese Communist Party. The party needed a way for its citizens to gain wealth (in addition to the domestic stock market, which has its own problems), and the real estate market has been an important source of provincial and local tax revenues.

The CCP has been cautious in controlling the bubble; the CCP cannot afford to have it burst because the destruction of wealth, both from the perspective of the real estate market and the stock market, would destabilize its rule. Therefore, the CCP needs to slowly lift the market in a controlled manner by easing and tightening liquidity into the real estate market as needed.

The Chinese authorities have been nominally “tightening” real estate for years, trying to prevent the housing bubble from bursting despite the fact that the result has been a growing bubble.

Real estate sales are more strictly regulated in China than in the United States. The law governs all aspects of Home ownership – how many homes a Family can buy, where they can buy them, and how they can finance the purchase.

Last December, at the Central Economic Work Conference, which set the agenda for China’s economic development path, regulators placed caps on domestic bank lending related to housing, mortgages and real estate development.

In China’s largest real estate submarket, authorities are cracking down on the illegal flow of liquidity into real estate. The recent purchase restrictions are reminiscent of Communist Party leader Xi Jinping‘s 2017 statement that houses are “for living, not for speculation.

“A March 16 report by Yicai Global said regulators have asked financial institutions in the southern city of Shenzhen to investigate “the flow of commercial loan funds into real estate. Authorities are concerned that some individuals are falsifying commercial loan applications and injecting the proceeds into real estate.

Local regulators in Beijing, Guangzhou and Shanghai have issued similar orders to crack down on the improper flow of consumer and business loan proceeds into real estate. During the pandemic, interest rates on consumer and business loans were cut to help small businesses escape the demand shock of the widespread blockade.

China is also concerned that loose monetary policies in the U.S. and other countries could amplify China’s domestic real estate bubble. In a policy report published earlier this month in the journal Public finance Research, former Communist Party Finance Minister Lou Jiwei warned that the rapid expansion of the Federal Reserve’s balance sheet could have negative spillover effects on China’s macroeconomy.

The premise is that as the U.S. and other foreign markets lose their appeal due to high Inflation or currency devaluation, investors could pour money into China and possibly into the country’s domestic real estate market.

In a regulatory move targeting individuals, authorities in certain cities (including Shanghai) are restricting home purchases by recently divorced individuals.

Under local laws in Shanghai and Beijing, each family is limited to a maximum of two properties, a restriction imposed in recent years to control housing prices in those cities. Local media report that such restrictions have led many couples to file for temporary divorce so they can buy two homes as individuals with the intention of remarrying later, effectively “circumventing the new restrictions” and buying their homes. Authorities are investigating ways to close this loophole.

“We’re all optimistic that prices in this area will continue to rise …… Divorce is the most effective way to reach our (investment) goals.” A man named Wu Xin said in a report by “The Sixth Voice” (Punch News International).