Chinese Real Estate Bubble

I will start off my first post by trying to answer the question that concerns the Chinese themselves most these days. Will China’s real estate bubble burst? There are indeed a few precursors to the bubble.

First, in the wake of the global financial crisis China’s largely export-oriented manufacturing sector tumbled and many entrepreneurs turned to real estate speculation for easier money. Second, construction material and machinery producers benefited from hefty government stimulus packages, which in turn contributed to the real estate bubble. Finally, relatively low taxes levied on resold property coupled with low mortgage rates had their fair share as well.

All of that led to a bubble that can burst like the American bubble if it goes untreated. However, China is in a much better position to prevent the burst, first and foremost because all major banks in China are state-owned. This means that lending rates can hike overnight, which happened in the late 1990s when China successfully cracked down on real estate bubbles in Beijing and Shanghai.  Chinese authorities could do exactly the same now and they are already discussing a steep tax increase on speculative operations when housing is resold within 5 years.

Moreover, the current bubble is almost entirely driven by developers as the emerging middle class can hardly afford housing. The ratio of the average annual salary to an average 1,000 sq. ft apartment price in Beijing is 1 to 80.[i] Plus, down payments reach 30 percent, which makes it all but impossible for an average citizen to buy property.  As a result, many newly built apartment buildings stay empty with only a few lights on at night. If developers cannot dictate the rules anymore, the housing market should return to normalcy.

To summarize, China’s real estate bubble is certainly a manageable problem, but China must act fast to regain control over the situation through regulatory methods. In the worst case scenario the government will provide liquidity to the banks, but it certainly prefers not having to do that.


[i] Dexter Roberts, “Will China’s Real Estate Bubble Be Worse than Ours?”, Bloomberg Businessweek, http://realestate.msn.com/article.aspx?cp-document

This entry was posted in chinese economic policy, chinese economy, chinese real estate bubble and tagged , , , . Bookmark the permalink.

2 Responses to Chinese Real Estate Bubble

  1. Marbella says:

    What do you mean with that if developers cannot dictate the rules anymore, the market should return to normalcy?…would they accept lower prices overnight and take losses right away? (which will send the wrong signal to investors…) or would they do like the Spanish and take losses slowly and at the same time extending the pain? Which position would the Chinese government take in relation to these losses?

    • Thank you for your question. I don’t think that the banks will literally raise the rates overnight. The government will most likely signal that tough measures are forthcoming.

      Also, the bubble really started in early 2009 and reliance on mortgages was not so immense as in the US. Finally, According to Patrick Chovanec, a professor at Beijing’s Tsinghua University who studies the Chinese real estate sector, only about 50% of residential purchases are made using mortgages. The other half are paid for in full at the time of acquisition. (In the U.S., by contrast, over 90% of residential housing transactions are financed with mortgages.)

      So even if a hard landing happens, the impact will not anywhere near the US. The Chinese government can easily afford to let it burst now and absorb the losses.

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