Overall, despite there are numerous reports stress that China is
under the risk of housing bubble burst (see the report here). However, China
has its characteristics. The concentration of population, the gap in income,
the consumption concept, and other factors may all influence the housing price.
With the vast territory, it is hardly to identify the housing bubble in the
second-tier and third-tier cities. Only choosing the data from first-tier
cities cannot represent all of China. Therefore, this blog still has
limitations about the housing bubble issue in China. Finally, thanks for your
reading.
Critical evaluation of the housing bubble in China
Based on the comparison of the Japanese and the US housing bubble
Saturday, 8 March 2014
Friday, 7 March 2014
Finding and implication
For the Japanese
government, they gradually began to implement an open domestic financial market
policy to make the interest rate of Yen liberalizing in the 1970s. Then the
adjustment of financial and monetary policy has facilitated the emergence of
the housing bubble. For the US government, in order to foster economic growth,
they encourage excessive consumption in the whole society. Moreover, financial
institutions lack of supervision and lure people consuming and speculating in
the market (views of Bernanke and Greenspan).
Compared
with the Japanese and the US housing bubble, despite the historical background
is different, but they have the common characteristics. Firstly, the irrational
industrial structure in the real estate market and the stock market result in
growth of capital flows, as well as the financial leverage and speculative
activities, causes the housing bubble and stock market bubble. Secondly, the
two countries implement financial liberalization policies. With the higher
degree of financial liberalization, the international investment will seek new
profit and enter the market when the economy starts to overheat then blowing
the bubble. Thirdly, the real estate economy account for a large proportion of
the national economy, the fluctuations in the real estate market will cause
macroeconomic shocks.
For the Chinese government, the first step is strengthening
financial supervision system to avoid large amount of credit funds into
nonproductive sectors to cause bubble. Secondly, to restrict intervention of
banks in the real estate market and publish loan criteria. Next, establish a
national system of early warning and forecasting real estate market. Meanwhile,
take care about the excessive international capital flows in the Chinese
market. Finally, reform of how to reduce the gap between poor and rich and
remain the stability of housing price should be considered.
Thursday, 6 March 2014
The Chinese housing bubble
In the past 10 years, Chinese economy has entered a developmental
period with a rapid annual growth rate of 9% or 10%. However, the rapid growth
is also problematic with potential issues. The whole world is recovering from
the financial crisis, both developed economies and emerging markets are facing
a new challenge. For China, the mainly increase is based on the investment,
foreign trade and consumption are not optimistic. In 2013, the growth rate
drops to 7.7% and forecast by the financial institutions, it will remain 7.5%
in 2014.
With the rapid development of the Chinese real estate market, the
total investment starts from 1015.4 billion Yuan in 2003 to 7180.4 billion Yuan
in 2012. The average housing price of per square meter rises from 2197 Yuan to
5430 Yuan between 2003 and 2012, and some first-tier cities have a greater
increase for 4 or 5 times as before. According to data published by the
National Bureau of Statistics of the People’s Republic of China, the
urbanization rate reached 53.73% in 2013, which improved 1.16% than 2012.
However, another phenomenon is that the proportion of peasant workers to buy
housing in their working areas is less than 1%. Owing to the lower income,
their purchasing power is still very limited. According to Mao Yushi(2012), a famous economist in China, said that
since the opening up in 1978, especially after the commercialization of
housing, most of the urban population improved their housing conditions, while
the housing conditions of the peasant workers in the city worsened considerably
than the past.
(see the report here)
From the demand part, Chinese people are very rich, especially in
the first-tier cities, and no matter how much the housing price is, they still
afford to purchase. From the supply part, the supply of land is limited. Land
is a scarce resource, the less land supply leads to a high land price and
housing price. In this case, the purpose of purchasing housing is to invest
rather than to live. Meanwhile, with the gap between rich and poor (the gini coefficient
is 0.473 in 2013), people who demand housing to live cannot afford it. Despite
government publishes the purchase limitation, it hardly to affect the real
estate market. Based on these, there actually has the housing bubble in China.
At the beginning of 2014, a lot of views of not sanguine about
real estate and property market crash hypothesis by insiders (such as Wang Shi, Wang Jianlin and Ren Zhiqiang) make the trends more confusing. Is the
housing bubble will burst in 2014? The answer is no. In this period, the
housing is still a relatively stable and valuable investment method for Chinese
people. In other words, if there has a new investment method that the profit is
much higher than keep the house to expect appreciation, then people will sell
their excess properties immediately and the housing bubble will burst.
Sunday, 2 March 2014
The US housing bubble
In recent 100 years, the two largest economic crises in the world
were all triggered by the US bubble burst. The Florida housing bubble burst led
to the crash of Wall Street stock market and great depression from 1929. In
addition, another housing bubble burst led to a worldwide financial crisis from
2008. This part will focus on the second housing bubble as it reflects more
issues.
At the beginning of 21st century, with the dot-come bubble and 911
attacks, the economy of US was in contraction. In this background, the Federal
Reserve had to carry out the low interest rate policy to stimulate consumption
and improve the economy. In 2004, the interest rate dropped to 1% and people
were more likely to purchase the real estate by home mortgages(more detail click here). In this way, US home prices were doubled as much as 2001
and government began to adopt tightening interest rate to raise the interest
rates. In 2006, the Federal Reserve raised the federal funds rate by 17 times
and the proportion of sub prime mortgage loans accounted for the national home
loans from less than 5% to 20% between 2001 and 2006.
Compared with the common loan, the sub prime mortgage loan has a
lower requirement of the borrowers’ credit history and repayment ability, while
the loan rate is much higher than the average mortgage(more detail click here). Therefore,
people who have lower income or poor credit history will apply for sub prime
mortgage loan. Moreover, mortgage companies, banks and other financial
institutions package these sub prime mortgage loans into mortgage-backed
securities then resell to other investors, it is the so-called securitization.
At that time, the sub prime mortgage loan made the incapable buyers to purchase
and a short-term shortage in the real estate market. People and financial
institution were all crazy with investment and speculation without thinking
about the potential crisis.
Facing the dramatic rise of housing price, the US government has
to control the market. With the increase of short-term interest rates, the sub
prime mortgage repayment rates have also increased significantly. Meanwhile,
the decreasing price in the real estate market makes the buyers hardly to
refinance through sell or mortgage their house. It results in numerous
borrowers cannot pay their loan on time or even default loans. Although banks
repossess houses while cannot sell them out at a high price. Due to a large
amount of losses and bad debt appear and the crash of the sub prime mortgage
derivatives, the housing bubble finally bursts.
Saturday, 1 March 2014
The Japanese housing bubble
Recovering from the World War Ⅱ, Japanese economy has made remarkable brilliant
achievements. In the early 1980s, Japan only cost a few years to catch up with
France, UK and Germany on economy, becoming the dominant power in Asia and
second only to the United States in the world. However, at the same period,
their best friend, the US, was facing the issues of the sharp increase in the
budget deficit and the foreign trade deficit. In 1985, the US hoped to release
these pressures by reducing the dollar exchange rate, and then the Plaza Accord has been signed.
With the rise in assets prices, Japan reached the peak of the bubble economy in 1989, most of the economic indicators stay at an unprecedented high level. As no more space to chase profit in such a high-price real estate market, speculators lose their desire and then bubble starts to burst. The Nikkei stock average drops from the highest 38915.87 point in December 1989 to less than 14000 points in August 1992. With the land price falls sharply, the loan secured by the real estate shows a great risk, which makes a disaster in financial institutions especially the banks.
The bubble burst leads to economic recession, enormous amount of bad debt in bank, numerous business failures and so on. With the high unemployment rate and suicides records at that time, Japanese were unprecedented panic to the future.
(Japan's economic bubble distant memory 20 years later)
Sunday, 23 February 2014
Research goals
Owning an expensive house always signifies success and wealth in
China, especially to the young man. That is why the housing bubble issue has
been chosen. From the research, the significant housing bubble of Japan and US
will be mentioned and compared with Chinese real estate market to analyse
whether there has a housing bubble. Two questions of how about the
housing bubble in China and what can China learn from the Japan and US after
the bubble burst will be solved. Meanwhile, I want to show something special to
draw my classmates’ attention to China.
Owning an expensive house always signifies success and wealth in
China, especially to the young man. That is why the housing bubble issue has
been chosen. From the research, the significant housing bubble of Japan and US
will be mentioned and compared with Chinese real estate market to analyse
whether there has a housing bubble. Two questions of how about the
housing bubble in China and what can China learn from the Japan and US after
the bubble burst will be solved. Meanwhile, I want to show something special to
draw my classmates’ attention to China.
Friday, 14 February 2014
Introduction
In recent years, housing bubble has become a hot topic as it is an
important factor in the financial crisis of 2008. The bursting of the housing
bubble in America ruined the economy and financial system, as well as leading
to a worldwide downturn. According to the definition of Kindleberger(1987),
bubble is a long-term rise in the price of assets for expectation on attracting
new buyers to invest for profits. With the rising price far higher than the
corresponding actual price, one day the bubble will burst with a sharp
drop in assets' price.
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