Graph of the week: how much for a house in Beijing?

Did you know that the prices of housing units in Beijing are higher than those in Manhattan? Could the reason for this be the lack of supply of land (as it is in Manhattan)? Or is it due to speculation that's even further fueling the Chinese housing boom? 

The last scenario might be more suitable to explain the situation. The Chinese are, like the Americans 10 years ago, and the Japanese 30 years ago, "flipping houses", to use the popular term. 

And here is the result:

Source: Quartz

The graph represents growth rates of housing prices in 4 major Chinese cities. Land parcels are being sold for record prices. In Beijing $1100 was paid for a square foot of a residential parcel (compared to Manhattan's average of $323, with the highest bid being $800). Other cities have also experienced a rapid recent growth in real estate prices and land for commercial use. The logical explanation would be that supply is scarce so land prices must go up. This could be true since some cities have applied tougher restrictions on the housing market to discourage speculators. But it is the speculation on the market that is more likely to be driving the rapid price increases:

"...Especially in big cities, apartments are often seen as investment vehicles more than as homesteads. For instance, even though swanky high-rises are getting more expensive in Beijing, their sales in smaller cities are flagging, suggesting that genuine demand is weak. As Bank of America-Merrill Lynch’s China strategy team noted in March, “China is building too many housing units too fast.” Per capita housing stock, they note, hit 35 sq m in 2011, and is rising by 1.2 sq m a year, putting China in the same league as many wealthy countries..."  

"... oversupply is already hitting smaller cities, and as demand flags, prices have started to fall. If that fall becomes severe enough to make developers run short of cash, they may discount their inventories in larger cities and cause prices to suffer there too.

If house values fall that could be bad news for China’s financial system, because people frequently use property as collateral. But the greatest impact will be on local governments, many of which now have colossal debt burdens as a result of stimulus spending. Largely unable to issue their own debt because of central government restrictions, local governments depend on selling land ... for revenue. In 2011, those sales accounted for more than 60% of local government revenue."

A few closing points on inequality 

Btw, with such high numbers being pushed around I can't shake of the fact that inequality is much worse in China than in the US for example. The people on the bottom, working in Western owned factories are working for 4$ a day (these aren't actually people on the income bottom, but let's assume for the sake of the argument that they are), while on the other hand those who can afford to buy real estate in Beijing or Shanghai simply to turn a profit by filliping them are surely much, much more better off. It is actually true that China's inequality problem is getting bigger. Funny for a country claiming to be socialist, isn't it? If you still believe that story, that is.

Bottom line, "state capitalism", to borrow the term the Economist used last year to describe the system of the new emerging markets, isn't really too helpful in lowering inequality. Just look at other examples of state capitalism such as India, Brazil or Russia. And these are the good ones. State capitalism's primary purpose isn't wealth creation - it's making sure that all these new wealth creating activities don't threaten the power of the ruling elites. 

Finally, it's not state redistribution that can solve the issue of inequality in emerging nations, especially if the very state is trapped by cronyism. Only inclusive institutions combined with high levels of social mobility can do that.