2010-07-12

We should use the supply side school of thought from former president Ronald Reagan

G20 looks to Beijing to drive global growth
Yi Xianrong, an economist at the Chinese Academy of Social Sciences (Cass), estimates that there are 64.5m empty flats and houses in China, many of them bought by speculators – the reflection of “an outsize property bubble”, he says in an article in People’s Daily last week.

If falling prices cause a building slump, it will have a big impact on the economy. However, Beijing has a fallback plan. Facing mounting discontent at high house prices, it has announced a huge push to build public housing, including flats that can be rented by low-income families. Local government officials are under heavy pressure to comply. The central Chinese municipality of Chongqing has announced plans to build 10m square metres of social housing a year – equivalent to more than a third of its residential construction in 2009.

“In the future 30-40 per cent will live in low-income government housing,” says Huang Qifan, the mayor of Chongqing. “The government should provide more land and housing, otherwise property prices will be driven up. We should use the supply side school of thought from former president Ronald Reagan.”
Increasing supply doesn't always work during the early phases of an asset bubble because it allows more people to participate, but the supply increases help to crater the price on the downside.

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