It’s always the hottest topic among Chinese people about the real estate price since the bubble is becoming bigger and bigger since the 1990s. We should know the definition of the bubble here: an unsustainable rise in the price of an asset, well above the market price given fundamentals. And the bubble is indicated by three indicators: gap between disposable income and home prices, rising inventory and number of properties per person.
Not like the United States, you cannot even imagine that for the majority of Chinese people they couldn’t even afford a house after working hard for the entire lifetime based on current real estate situation. The fact is that China’s real estate price have been undergoing a lot of changes with prices soaring in the past we now see an environment of declining prices. This phenomenon let investors question: will the real estate bubble really burst in China? (China’s Home Prices Rise to Record Levels)
Optimists insist that the prices won’t decrease a lot due to the large population and demand in China. They also mentioned that right now in the bubble, China’s residential mortgage debt was only 15% but U.S. always has a mortgage rate as high as 80%. (Why China’s property market isn’t in a bubble)
Also, from what I read from < A Random Walk Down Wall Street>, people are always willing to join the heated market though they are aware there are already a large crowd of people in it. It’s like the Tulip-Bulb Craze, like the South Sea Bubble, the greed of human beings make them step into a “promising” investment field. They only care about the increasing price but not the facts behind the scene. Greed makes people crazy as well as blind. However, according to the history facts shown in the book, we have to know: bubble will burst sooner or later. Early investors will gain profits from the market while crazy crowds will only be taught a blooding lesson in investments.
While pessimists don’t think so. They are arguing that as the mature of China’s financial market, people might be less likely to purchase houses because they would have more options for investment in future.
And then from population side, statistics show that the population will reach the peak in 2018 and labor force will shrink from 2015. Thus people predict that the property prices will start to fall between 2017 and 2018 thanks to the “one child policy” and China’s aging population composition. According to this information, pessimists predict a 40% decrease in the next five years since there will be fewer people willing to purchase a house but the supply is still large. Anther great concern of mine is the money chain of the real estate company because the majority of them burn a large percentage of loan. Once the supply is bigger than the demand, they’ll face a money chain rupture. They have to decrease the price attracting more buyers to save the company.
If the crash did come, it could cause a financial crisis like United States met in 2008: when housing prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe. (subprime mortgage crisis)
To save the market, right now Chinese government is taking great efforts from policy intervention. Let’s have a brief look at China’s housing industry changes in recent years.
Before 2003, as developing with China’s economy, Chinese government regulated and supported the under developed housing market. From 2000, there was no more housing allocation existing in China any more and people had to purchase houses through housing companies. Then they enacted a series new rules and regulations such as a lower mortgage rates, reduced down payments, lower transaction rates and cuts in business to further stimulate the housing industry.
Then in 2002, Land Public Building System was enacted. Following in 2004, all lands started to be publicly bid and auctioned. Those changes could be regarded as causes why housing prices rise. From 2004 to 2006, with Chinese government encouraging housing sales and offering lots of benefits to housing industry as well as stimulating the whole economic situation, prices of houses rose a lot not only in big cities but also in small inland cities. Housing industry boomed rapidly during this period.
In 2005, in order to control the increasing price, “Eight Rules,” “New Eight Rules” and “Opinion of Such Departments as the Ministry of Construction on Effectively Stabilizing House Prices” were enacted, marking central government’s first efforts to rein in home prices. But the trend seemed really hard to stop, for example, only in the year of 2005, average housing price in Beijing increased by 20% while the price increased only 0.78% from 2000 to 2004. It’s increasing higher and higher to form a bubble no matter what the government tried to stop it since then.
Later in 2010, China posted “Notice of the State Council on Resolutely Curbing the Soaring of Housing Prices in Some cities” to require a down payment on second homes from 40% to 50%. In addition, banks must charge a minimum mortgage rate on second homes of 1.1 times the benchmark interest rate and increases down payments on first home larger 90 square meters from 20% to 30%. Then in 2011, China had “National Eight” real estate market regulations. On the other hand, Chinese government has started the property tax pilot program which I think is pretty useful seen in the market. The program asks for more tax if you buy more houses in China. And it has been started in Shanghai and Chongqing since 2011. (Many Chinese Welcome Idea of Property Taxes)
Prices might be controllable in future thanks to the government policies and so far, recent policies have not been given deadlines. In short run, volatility may be seen due to uncertainty.
Though we are not totally sure whether the bubble will burst or not, recent situation in China gave me a clue that perhaps the bubble is bursting. According to the Securities Times newspaper, housing developers in the industrial city of Hangzhou cut prices this week by an average 19% in a scramble to sell about 120,000 newly-built apartments. The current inventory of new, unsold units now exceeds the total number of housing units offered for sale in Beijing and Shanghai combined. A study by Shanghai’s Tongji University said real estate has been especially shaky in the northeastern city of Wenzhou, where new-home prices have fallen every month for the last two years.
Indicating from the information above, Personally I think the housing bubble will burst in a near future or actually it has been bursting already.