Nov 2011 17

Chinese Real Estate Bubble – About to Burst or Just Slowly Deflating?

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Chinease House by John Heaven Chinese House by John Heaven

The question many economists have been analyzing lately relates to one of the biggest real estate markets in the world: China. It is clear that there is a housing market bubble, and nobody disagrees that its impact could be considerable. The real question is: how big is it really going to be?

This question became a nightmare not only for the Chinese government, but also for European and American leaders, still living with a vivid memory of the U.S. real estate bubble burst crisis. Although it didn’t seem possible a year ago, today it seems perfectly reasonable to say that the Chinese property bubble looks benign. It’s probably going to slowly deflate without causing any greater harm, as argued at The Economist’s Buttonwood Gathering.

Bubbles All Over the World

The Chinese housing price index has risen by at least 70 per cent since 2000. Year after year, housing prices increase by as much as 10 per cent in some cities, and by at least 3 per cent in the major tier-one cities, according to the National Bureau of Statistics. This increase in prices is very similar to the development of a property bubble in Japan (1982-1991), followed by “lost decade,” and the U.S. property bubble formation (1996-2006), which caused much greater crises. However, the Chinese government has taken action to revive property markets soon enough, and it seems to be working.

Is Chinese Bubble Identical to the U.S. One?

Empty by Peretz Partensky Empty by Peretz Partensky

Although some say that the U.S. and Chinese bubbles are identical, the opposite is true. They are very different. While the U.S. decreased interest rates while housing was increasing rapidly, pretending the bubble didn’t exist, China started to raise rates to make loans for housing very difficult to obtain. China also exploited the European Union and U.S. suffering economies in times of global financial crisis and gained $700 billion in stimulus spending. Despite the huge potential, not all investments made of this capital met with success.

Empty Cities

With the stock market as stable as a casino and bank rates just above inflation, the Chinese don’t have many options concerning where to invest their money. Hence, the government started to build extensive housing, relying on the “build it, eventually, they’ll come”. The problem is they haven’t — yet. China has to deal with a problem that might potentially increase into a magnitude China will no longer be able to maintain. Vast ghost cities, holding an estimated 64 million empty flats in total, according to SBS Dateline. Also large commercial centres all over the country now stand abandoned, unused.

Not So Bad After All

Not only has China experienced the continuous growth of home prices, but also the investment/GDP ratio reached 48.5 per cent as of last year. Despite this development, the Chinese bubble has been able to resist the pressure and prices of properties still haven’t fell rapidly. Barclays named these factors as reasons for continuous sustainability on the market: “Strong income growth; Urbanization, home upgrading and favourable demographic change; Limited investment alternatives; Households’ strong balance sheets. According to Barclays, “The IMF-HKMA (2010) research found that over the past decade, when misalignments in house prices have occurred in China, they have been corrected relatively quickly.”

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