A recent hot issue was a property developer's decision to slash 600,000 yuan off the down payment for buyers. This action was immediately halted and deemed illegal, with accusations of disturbing market order.
Why is it so difficult to reduce housing prices? The underlying question is: Whose interests are affected?
Before delving deeper, let's touch upon two observations:
- When prices soared in the past, the authorities praised it as prosperity. Now, when there are discounts, they claim it disrupts order.
- Does the concept of state monopolies in salt and tobacco production sound familiar?
Naturally, we can identify three main stakeholders: homebuyers, real estate developers, and banks.
Homebuyers: The least influential group. At most, they may protest against price reductions, but their overall impact is minimal.
Real Estate Developers: For competitors, one firm's decision to offer discounts adversely affects the profits of others. Land acquisition costs vary, and while one firm may still cover its costs after a price cut, others might not. For these developers, if they can't even recover the land cost, they are unlikely to secure new debt, leaving them in a dire situation. Every developer knows that real estate is like a game of hot potato, hoping they're not the last one holding it. Hence, when competitors slash prices, they retaliate aggressively (similar to how Google countered Microsoft's integration of ChatGPT into Bing: because search engines are Google's bread and butter).
Banks: Arguably the most concerned party. The logic is: if a property firm goes bankrupt, it's a loss. But if a bank collapses due to bad debt, it's a systemic risk.
To elaborate:
- Not reducing prices will maintain the property value:
- Considering that major companies (not just real estate firms) use properties as collateral for bank loans, a price drop in one area implies that the value of these collaterals has decreased. This poses a significant risk for banks. If one developer sells land at a reduced price, the value of all collateral properties in that area drops. Possible solutions may include:
- Asking clients to add more collateral (which is nearly impossible now, as developers have already pledged all they can).
- Terminating contracts with clients (not ideal since banks need to lend money to earn).
- Using various means to suppress any actions or movements that may reduce the property prices.
- From the borrower's perspective, considering a 600,000 yuan discount on a 3 million yuan property (with a 30% down payment of 900,000 yuan), now only 300,000 yuan is needed upfront. This effectively made those residents that are unable to handle debt to shoulder greater financial leverage. This would likely lead to more bad debt crisis for banks (even if it's a small proportion of the total volume).
- Considering that major companies (not just real estate firms) use properties as collateral for bank loans, a price drop in one area implies that the value of these collaterals has decreased. This poses a significant risk for banks. If one developer sells land at a reduced price, the value of all collateral properties in that area drops. Possible solutions may include:
- Not reducing prices is crucial for financial stability, especially for bonds. With bonds being the main instrument in circulation, it's a convoluted system. A drop in property prices would depress the market value of bonds secured by properties or land-use rights. This could result in significant losses in financial products, triggering margin calls and a possible cascading collapse (similar to the 2015 stock market crash and incidents involving Bill Hwang and the 2020 circuit breakers).
- Not reducing prices is vital for local government to not go bankrupt by land sales. If land prices fall, both the central bank and the state would be alarmed. Unlike other advanced economies where the central bank focuses on monetary stability and the treasury prioritizes economic growth, in our country, both pursue stability. If a region's land prices drop significantly enough to threaten the overall banking system and then need central bank to cover the loss, the national government won't let it happen - too costly.
In conclusion, the underlying forces are desperate to maintain land values, ensuring the wheels of our highly leveraged society keep running. Continuing without faltering seems unrealistic to me, as it goes against basic logic. Yet, given the herd mentality and widespread social indoctrination, maybe we can achieve this.