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.