Nobel laureate: Falling home prices won't phase China's economy

James Mirrlees, winner of the 1996 Nobel Prize in Economics recently said falling house prices will not cause a serious impact on the overall Chinese economy, and he suggested property taxes on vacant properties to stop property developers from hoarding land and houses for speculation.

James Mirrlees, winner of the 1996 Nobel Prize in Economics
Mirrlees said despite the fact that the recent financial crisis was initially caused by the bursting of the U.S. housing bubble, the U.S. mortgage business model is very different from most countries. According to his analysis, in most cases, even if housing prices fall 30 percent, the impact on the overall economy will be very limited.

For homeowners, the falling housing prices will not have any material impact on household spending, while for people who are still paying for housing loans, as long as they do not default, the banking system will not be affected.

Mirrlees said from the experience of Hong Kong in the past, house prices falling sharply will not necessarily lead to a high rate of mortgage defaults. In 1998 in Hong Kong, there were dramatic declines in housing prices, which decreased far more than the U.S. market, but the default rates were low and banks were not affected at all.

As for the Chinese market, Mirrlees said the falling house prices will not help to ease the rigid demand for real estate. The huge number of sold but unoccupied residential properties is the crux of why ordinary people can not buy a house.

Mirrlees proposed property taxes on vacant property to promote these properties into markets.

Mirrlees is Emeritus Professor of Political Economy at Cambridge and Distinguished Professor-at-large at the Chinese University in Hong Kong. In 1996 he was awarded the Nobel Prize in Economic Science for his pioneering work in the field of information economics.

In a series of seminal papers, he developed theoretical approaches that have allowed economists to study situations where parties involved in, for example, the trade of some goods or services have different information about a critical aspect of the trade. One example is where a seller of goods has better information about their quality than the potential buyers.

The capacity to formally analyze situations where information asymmetry exists between participants in an economy has meant significant advances in the scope of economic theory. These advances have had major influences on the design of public policy as well as on contracting and personnel management within organizations.

By Huang Beibei, People's Daily Online