Chinese real estate market start to collapse (Part 2)

The local governments relay on the prices and sales of houses to increase their GPD target, so they have incentive to support the real estate bubble and maintain the house prices. However, the new Chinese centre government limited loans provided by bank to those developers, this policy was determined by the centre bank in Beijing and no other local branches can disobey that. Thus the local government can’t help the real estate firms much even if they wished to.

However, a large scale bankruptcy of real estate development firms may not be acceptable. Reported in WSJ, (the current number bankruptcy) this is acceptable as long as not too many companies go broke at the same time and doesn’t result too much disruption, Mr. Chan added. In other words, they don’t want a “Lehman Brothers” moment. The real estate regulation is sure to be more influential to those developers who don’t have much fund support. Said by John Allen, chief executive officer of private investment firm Greater China Corporation in a later speech. “Bankruptcy is one of the healthiest things around. You want to get rid of the weak players.”

The current goal of Chinese centre government is to regulate real estate market and try to “shrink” the bubble, no one wants to cause a larger bubble or burst the bubble so early. The current situation is favored by Beijing, small real estate firms go bankruptcy in a moderate rate. According to WSJ, now that measures by Beijing to rein in the availability of credit and cool the housing market are beginning to bite, some developers are feeling pinched.

In 2010, Beijing start its curbing on lending to real estate developers, the centre government trust that the house market will be cooled in several years. For real estate property developers, the fund is most important thing for their sustainability. With enough fund, the house prices can stay high, without enough fund, the developers must sell their houses at a lower price because they must recollect the fund and pay the debt. The actual effect of policies from Beijing was quite effective. According to the chart from WSJ below, the difference between sold and construction has becoming larger. And the surging number of constructed houses stopped and went down at from the end of 2011.

No doubt that the downward trend of house market has already began, but there will still be few more years before the market returns to its normal health. The next question for Beijing is: how to minimize the harm caused by the burst of bubble.

2 thoughts on “Chinese real estate market start to collapse (Part 2)

  1. gaochen

    Very good post on housing market in China. I think the economic reform on housing market is effective and did control the home price. However, the reforms in general might already cause a threat to the economy. The GDP has fallen to 7.4% and it’s dangerous for the employment. The government might need to figure out a way to reform the economy gently.

  2. tyuan@umich.edu'tyuan

    As a Chinese, I’m happy to see the housing price go down but worried about those housing companies and banks as well. The hardest part for the government right now is to keep a balance. How to decrease the price to make people feel better but not let the housing industry collapse? Hope the government will do a good job.

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