China is not the only country with this problem. The problem over inflated property prices also affects many developed countries, including America, UK, Australia and Singapore.
The citizens of these countries were led to believe that property assets are an excellent form of investment. When property prices rise, they expectations turned out to be correct. Properties were a great form of investment.
However, the property prices can go up to unrealistically high levels, which are beyond the reach of most citizens based on their earnings. These prices become a bubble.
We have to watch how China deals with the bubble. How can they bring down their prices to a reasonable level, without crashing the market and causes large losses to the existing home owners?
I read an article that described a possible solution. The China authority has been working on this solution for the past decade. It is not a solution that they cooked up in a hurry.
According to this article, China will be creating real estate investment trusts (REITS) that will buy the existing properties and offer them for rental to tenants.
I believe that this approach will work. Here are my reasons:
1. It is possible to set the rentals at a fair level that reflect the average earnings of the tenants. When the earnings increase, the rentals can be adjusted accordingly.
2. The rentals will be market related, but will avoid the wild swings caused by speculation and temporary shortages or over supply.
3. This mechanism will provide a fair return to the investors of the REIT and make the housing affordable to the tenants. It is market based, but exclude the excessive market speculation.
4. There are still many challenges that need to be overcome, but I find the general approach to be appropriate.
Tan Kin Lian
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