Diamond News

Panos Mourdoukoutas

Photographer: Qilai Shen/Bloomberg© 2016 Bloomberg Finance LP

China’s top long-term problem isn’t the trade war that dominates the social media recently. It’s a home bubble—the soaring home prices that makes landlords rich, while it shatters young people’s dreams of forming a family.

Average prices of new homes in 70 Chinese cities climbed by 9.7% on an annual basis in December of 2018, up from a 9.3% in the previous month, according to Tradingeconomics.com.

That’s the 44th straight month of price rises and the strongest annual gain since July 2017.

Soaring home prices put homes beyond the reach of the country’s average citizen. And that hurts the country’s long-term growth prospects, far more than the trade war. In fact, the trade war is just a temporary problem. It will ease, once Washington and Beijing find a formula to appease nationalist sentiment in the two countries.

But the problem of home affordability that constrains young people from forming a family is here to stay, and could be compounded by other factors. Like the middle-income trap and the Lewis point, as discussed in previous pieces here.

Worse, the soaring home prices in major Chinese cities isn’t an accident. It’s the product of deliberate local government land policies that favor rich landlords over the average citizen.

How? By creating scores of “ghost cities” -- cities filled with buildings with vacant apartments. “The mismatch between the cost of new homes and the content of the typical Chinese wallet is complete,” writes Ruchir Sharma in BREAKOUT NATIONS: The Pursuit of the Next Economic Miracles.“ Developers are building “ghost cities—“ vast tracts of apartment high—rises and malls that remain largely vacant because the Chinese worker can’t afford them.”

Vacant apartments belong to wealthy landlords who expect to sell them...

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