According to any standard China’s property market is acting crazy, but – tells Arthur Kroeber the Business Spectator – it might be “sustainable madness”.
“There is no question that much of it is irrational, but we tend to think the irrationality can last a fair bit longer than outside observers usually think.
“To boil it down to its essence, China’s housing market is supported by the capitalisation of inner-city land values. So long as inner-city land can reasonably be capitalised, and a portion of the financial proceeds transferred to residents to subsidise their purchases of newer flats farther from the city centre, the apparent madness of house prices 10 times average household income can continue. This process is not infinitely extendable but we tend to think it can run for another three or four years.”
The other comforting fact, says Kroeber, is that personal leverage in China is very low, so that if there were a property price collapse it would not have the devastating effect on household balance sheets and confidence that the same thing in the US did in 2007-08.