Conclusion

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.

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.

（see the report here）

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.

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.

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.

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.

After that, the exchange rate of dollar to yen from 1:250 to 1:120 between 1985 and 1987. The Plaza Accord seems to make a promise of certainly profit in Japan and leads to large amount of excess money and international capital inject to Japanese market (Monetary Policy and  The Plaza Accord). Meanwhile, with the rapid appreciation of yen, bubble increase rapidly and Japan falls in the wave of speculative activities, especially in the stock market and the real estate market. People all believe that the land will never be devalued and purchase land for resale, and banks take the real estate as a mortgage to make large number of loans to the debtor. Due to the dramatic increase of economy, the Japanese become the richest people in the world, and the price of total 23 areas in Tokyo even reaches a level of that can purchase all the American land.

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）