Castles Built on Sand

by Adam K. Webb on April 29, 2010 · 12 comments <span>Print this article</span> Print this article

in Economics & Empire

sandcastle

If the world is a fun-house hall of mirrors, Westerners can see an alarmingly swollen version of themselves by looking eastward.  Swollen things, as is their nature, threaten to burst.  The second great real estate bubble of the global crisis is building in China at this very moment, and in some scenarios could bring even more spillover damage to the world economy than the first one did.  The sense of urgency grew this past week as the government here took measures to rein in real estate speculation, including by raising the minimum down payment on second homes to at least 50%.

I heard not long ago that one of my former students, now working at her first job, had scraped together a down payment from her parents to buy an apartment for one million yuan.  Given Chinese salaries, this is much like a recent college graduate signing a mortgage on a one million dollar condo in America. The skyrocketing real estate prices here supposedly made this a savvy investment, as her equally anxious classmates were gravely concluding with an eye to their own futures.  Prices per square metre in Beijing are now up to some 26000 yuan ($3800) and rising fast.  Many renters wonder if the property ladder will be pulled up before they get on it.  Apartment prices in the centre of Beijing and Shanghai are converging fast on those in other global financial centres, putting them out of reach of all but urban professionals and the newly rich.  And the feverish speculation is reaching inland to second- and third-tier provincial cities.  One of my faculty colleagues recently bought a slightly more affordable place on the outskirts of Nanjing, so far beyond his already long commute that it was, as he put it, almost in another city.

The housing fever here is reshaping daily life.  Young male migrant workers struggle to save money to buy a house before they have any hope, especially given the gender imbalance, of finding a wife.  In the ever tighter and more materialistic marriage market, more than a few women are marrying a house as much as a husband.  Among the middle class, crushing mortgages have turned many insecure white-collar workers into “house slaves.”

The bubble comes partly from policy, just as it did in America, Britain, Spain, Ireland, and other countries hit hard by the first crisis two years ago.  The Chinese government has undertaken a massive spending stimulus, hoping to ward off the kind of severe downturn that could make an already impatient populace revolt.  Much of the money has flowed into local real estate projects.  City governments have got into the speculation game with a vengeance, with a third to half of their revenues from less than transparent deals with developers.  A bursting bubble would bring down the national fisc with a far bigger crash than any seen in the West so far.  China’s national debt on paper is lower than that of most Western countries, but scratch the surface and one finds massive liabilities building up at the local level and among companies partly owned by various levels of government.  A price collapse would ruin them.  Already, the signs of reckless overbuilding are coming to the surface.  Some one million square metres of office space in Shanghai sit vacant, and new shopping centres all over China have eerily few customers walking around them.

Policy is only partly to blame.  Consumer and investor behaviour has also been deeply misguided.  The rush into real estate speculation is understandable enough on one level.  With exchange controls that make it hard to move assets offshore, a volatile domestic stock market, and fears of massive inflation to come, Chinese with high savings rates have few secure places to put their money.  For those who like reflecting on the distortions of modern economic life, this pattern could be a mixed blessing.  Buying real property could well be a more stable and more place-based form of wealth than the confidence game of the capital markets.  If China were truly becoming a property-owning democracy, then these investment choices could be quite hopeful.

But look a bit deeper, and we find some much more troubling assumptions writ large here.  For one thing, ownership of real estate here is never freehold, with a permanent title that can be passed down through the generations as in traditional society.  It is a long term lease, typically seventy years.  Developers aiming for a quick profit do not build to last.  Even apartment buildings fifteen or twenty years old already look like tenements, with leaking plumbing and the window frames visibly rusting and falling apart.  They are shoddy even compared to countries at the same level of prosperity.  Old neighbourhoods like the hutong courtyard homes of Beijing have been replaced by monstrosities of concrete and glass.  Preservation has been cast aside in the rush to modernise in the most superficial of ways.  One builds for a generation at most.  One of my friends here once remarked that there is little sense of an enduring family home, since the son has to build a new and different house from the father each time.  Just as the architect, guildsman, and distributist A.J. Penty wrote early in the twentieth century, complaining about new developers’ practice in England at the time, people no longer value housing built with an æsthetic of care and permanence.

Much of this is hardly unique to China, therefore.  The impermanence of modern housing is a worldwide trend that reflects more than policy.  Tocqueville once remarked that homes on the American frontier were hastily hacked from the forest, only to be abandoned a few years later as the owners moved on to more promising terrain.  Such mobility has become the psyche of late modernity.  Decaying tenements and leasehold in China are matched, in spirit, by the Western pursuit of the “starter home,” leading always up the “property ladder” to something bigger and better.  They are trajectories of modern wealth, not embodiments of space and sentiment.  How many McMansions will survive, weathered by history and experience, two centuries hence?  No one is likely to walk around the site of what was once a modern housing development, and feel the same enduring human presence that I have felt in well preserved mediæval towns, long-farmed village landscapes, and even the stone-marked paths trodden by generations of muleteers through chilly mountain passes.

To many FPR readers, no doubt it is more appealing to think of real estate as bound up with place and people.  The owner-occupied cottage, enduring over the generations in a family of farmers or craftsmen, is a cultural ideal for those of distributist bent.  But the traditional view of property can be broadened a good deal further.  Even as an asset rented to someone else, real estate used to have a very different economic function and used to support quite different habits of mind.  A distant relative of mine kept, for his entire lifetime, a small office building in Sheffield first bought by his great-great grandfather in 1736.  The Methodist founder John Wesley used to preach to crowds from a window diagonally across the square in the 1770s.  One has a very different connexion to a place on such a time frame, and much more of a stake in its sustainability, even when one does not live there oneself.  Such a view of place-based property is from quite another world than that of the condo-flipping speculator who wants to get in on a new development, leverage a tiny down payment, and then sell at the peak before moving on to the next bet.  Even for the average homeowner, ownership all too often is imagined as a way of gaming income flow and consumption over a lifetime, accumulating enough to spend down before one has to become a ward of the welfare state.  It is part of consumer society, not a buffer against it.

And this is a game encouraged by policymaking élites.  The house slaves in China, and the Fannie Mae borrowers in America, have their noses to the grindstone in ways that work quite contrary to what small-scale property ownership used to mean.  It used to mean a decent independence from the more degrading aspects of first serfdom and then the capitalist labour market.  It meant the security of the home as “castle,” a vision that prompted Prime Minister William Pitt to marvel that “The poorest man may in his cottage bid defiance to all the forces of the Crown. It may be frail, its roof may shake; the wind may blow through it; the storm may enter, the rain may enter—but the King of England cannot enter; all his force dares not cross the threshold of the ruined tenement!”

Now, the practices surrounding property ownership tend to lock people more firmly into the soulless rat-race of consumer society, to serve others’ ambitions of profit and power.  Even those who own property without a mortgage have, especially in America today, high (and regressive) property tax payments that bind them into the labour market.  There is something deeply wrong with a society in which property works against place rather than for it, and for dependence rather than independence.  Anyone from two hundred years ago would think it required an unusually dark imagination to invent a system in which either could be the case.

Some of the remedies to these trends are cultural, along the lines of what many on FPR have been encouraging.  Others might focus on key policy pressure points.  Discouraging speculation by raising down payment requirements, particularly on non-owner occupied housing, is one obvious and oft-proposed measure.  Less obviously, lengthening the workmanship guarantee that builders must insure and encouraging sustainable forms of construction (brick and stone rather than clapboard, for instance) might also shift time horizons.  Capital gains tax rates could favour much longer term investment.

It should also be a priority to lighten the continuing financial burdens of small property owners, to rebuild a distributist-style independence and the flexibility to withdraw from some excesses of the modern labour market.  One method could be to replace ongoing local property taxes with a one-time contribution, at the time of construction or purchase, to a community-owned capital endowment out of which to finance the bulk of local expenditure.  Such a capital endowment could support local businesses in turn.  It would feed back into local employment, to counterbalance the tendency in many areas for wages to lag behind housing prices.

In the end, of course, any solution to such real estate bubbles and the accompanying cultural pathologies must be part of a bigger picture.  But we often pay too little attention to the vision of ownership that must inform it.  The distributists offer valuable insights into dispersion of power and the material conditions for human dignity and community.  Bubbles of this sort should prod us to refine both the diagnosis and the alternative.  We should consider not only how to bring about widely distributed ownership, but also how to strike a balance across housing and productive assets, how to lengthen time horizons, and how to channel often quite simple and human aspirations to prosperity into channels that fortify rather than erode character.

{ 12 comments… read them below or add one }

avatar John Médaille April 29, 2010 at 8:32 am

People worry about China today much in the way they worried about Japan 20 years ago. But China is headed for a crash that will make ours look mild by comparison. For one thing, their banking system makes ours look like a model of rectitude. For another, their demographic problems–after several (non)generations of the one-child policy makes recovery impossible. Finally, the system is so corrupt that rational decisions are near impossible.

The odd thing is that China had two very good models of development to work with: Hong Kong and Taiwan, both of which were applicable to the Mainland. China staked everything on exports, which means they had to convert their earnings into American treasuries to support the American consumer. But they had the biggest internal market in the world, and had they developed that, there could have been real prosperity. Now they have the same sham we do, and it is hard to say whether they are the 51st state or we are the most remote province. Had they supported the peasants, they could have built their industries using the formula that worked so well on Taiwan. The “Land to the Tiller” program began development the only way it can begin, from the bottom up. Small ownership created great demand for consumer products, which fueled the industrial boom and created what is possibly the most stable economic order in the world.

The mainland will not be so stable.

avatar Amy Calva April 29, 2010 at 9:25 am

” There is something deeply wrong with a society in which property works against place rather than for it, and for dependence rather than independence.”

Agreed wholeheartedly, but is it really property if it can be so quickly and easily revoked? Either by property tax or eminent domain on behalf of Wal-Mart or the Home Despot.

avatar Russell Arben Fox April 29, 2010 at 9:55 am

An enlightening contribution as always, Adam; many thanks. I don’t have the fiscal chops to adequately assess your diagnosis and proposed responses, but this one in particular really struck me:

One method could be to replace ongoing local property taxes with a one-time contribution, at the time of construction or purchase, to a community-owned capital endowment out of which to finance the bulk of local expenditure. Such a capital endowment could support local businesses in turn. It would feed back into local employment, to counterbalance the tendency in many areas for wages to lag behind housing prices.

There are, of course, a variety of “stakeholder”-type proposals out there, which in different ways all revolve around the notion of providing individuals or communities with a given fund which they can pay into and/or draw from as necessary to further establish their own–in some ways circumscribed, but in other ways liberated–growth and development, rather than having said individuals or communities be strung along by a mandated schedule of taxes and/or entitlements. Arguably, Social Security, and other kinds of old-age pensions, draw upon this sort of concept. To see it applied as form of stakeholder development, with the homeowners of a community contributing to an endowment rather than to a running budget, has some real appeal to it. (Though I wonder the initial buy-in to such a scheme might be so great as to lower home-ownership, or skew it towards a particular economic and social demographic, so dramatically as to undermine some of the other promises which property can provide.)

avatar Adam K. Webb April 30, 2010 at 12:27 pm

“To see it applied as form of stakeholder development, with the homeowners of a community contributing to an endowment rather than to a running budget, has some real appeal to it. (Though I wonder the initial buy-in to such a scheme might be so great as to lower home-ownership, or skew it towards a particular economic and social demographic, so dramatically as to undermine some of the other promises which property can provide.)”

If necessary, the monthly payment on interest if such a buy-in were capitalised would not be much more than what new homeowners now pay for property taxes. It would also not continue to go up based on forces beyond their control.

avatar Russell Arben Fox April 30, 2010 at 1:58 pm

Adam,

the monthly payment on interest if such a buy-in were capitalised would not be much more than what new homeowners now pay for property taxes

Did you mean “the monthly payment of interest” in the above sentence, meaning that new homeowners would borrow to achieve the buy-in, and would be able to spread out the interest payments on the loan? Or did you really mean “monthly payment on interest,” which I assume means that the buy-in wouldn’t happen all at once, but that, perhaps, some homeowners association or such would provide them with a stake, and they would pay it off (with interest included) like a mortgage? Either way, doesn’t your response compromise the force of your argument for “a one-time contribution”? Which would seem to leave intact my concern that the range of people capable of making that contribution would be much more limited than is the case with homeowners today. Or am I just misunderstanding your point?

avatar Adam K. Webb April 30, 2010 at 10:37 pm

From whom they borrow seems less important than the fact that ultimately they pay off not only the cost of the property but also the bulk of the tax obligations attached to it. The point about being able to borrow the one-time contribution is merely a way around the problem you identify, namely that it would be difficult for some buyers to come up with a lump sum at purchase.

I just ran the numbers through one of the many online calculators to see how this would work out. To simplify, take a $300000 property with an 80% mortgage over 30 years at 6.5% and a 1% property tax rate (this is low in many areas of the US now, of course). Doing things conventionally, one’s total monthly payment for mortgage and tax would be $1767, of which $250 would continue even after paying off the property. Doing things the way I propose (with a one-time buy-in to a local endowment) would raise the total monthly payment to $1896 per month, but it would then disappear entirely at the end of the loan. It is higher, of course, but not unmanageably so. If the endowment is well managed and revenue/spending patterns remain under control, then no future distinct contributions by buyers should be necessary; they would be built into the market price for future buyers, because each (old) property would carry with it its own share of the endowment.

Moreover, the spillover benefits in greater security of property, and a pool of capital to support local economies, would far outweigh slightly higher up-front costs. Unlike the alternative proposal (and the practice in much of Europe) of shifting local running costs into state or national revenue/spending, through income taxes, it also does not shift power upward to higher levels of government. It keeps control over spending and a large pool of capital at the local level.

avatar Russell Arben Fox May 1, 2010 at 9:03 pm

Ok, I understand your suggestion much better know; thanks for running the numbers and laying it out for me. Do you know of any country or region that has experimented with this or a similar proposal?

avatar Adam K. Webb May 2, 2010 at 11:40 am

Not as such. There is very little in the way of community-owned capital endowments anywhere. Perhaps the closest analogy would be some premodern societies in which many of the functions now carried out by the state were the charge of the monasteries, waqfs, and the like, and the fiscal burdens were not on property owners in general.

avatar Grace Potts May 3, 2010 at 11:12 pm

Curious-

Forgive me if this is obvious. But this community endowment – it would be invested somewhere, no? Is the boon to local business that it would be invested in financing local start-ups or expansions? And then the principle is paid back to be loaned out again for new businesses, whilst the interest covers the cost of administration and public services?

Do I understand the idea correctly?

Thanks in advance-
GP

avatar Adam K. Webb May 3, 2010 at 11:34 pm

That is the general idea. In the case of an endowment specifically for defraying the running costs of the community, the bulk probably should be invested locally. Some diversification on a broader scale–perhaps cross-investment with other communities–could also be desirable.

avatar Grace Potts May 4, 2010 at 7:59 am

Oh-

How elegant!

peace, and all good-
GP

avatar Migren April 4, 2011 at 4:11 pm

An old topic but I want to say something.
I agree with your thoughts …
i live in china … Beijing …
23000 yuan per square meter in prices in here and rising fast.

Think you can do the rest …

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