Real estate bubble of Japan

In order to deeply analyse the real estate bubbles, I will take Japan as an illustration. There is a famous economic bubble in Japan from 1986 to 1991. During that period, real estate and stock prices were seriously inflated. Real estate prices experienced a manic process that price in Tokyo is 350 times more expensive than comparable land in Manhattan and New York.

So what is the reason of this bubble? Firstly, we need to realize the background. After the second war, the government in Japan encouraged people save their income and then the yen appreciating. The financial assets become very expensive and luxurious.  Secondly, Capitalism allows marginal buying for speculation with self-risk-taking. Banks and government encouraged people to do this. What is more, Japanese used to believe a sort of myth that real estate value will never fall down because the limited land. At last, the most important point is that overconfidence and the Bank of Japan’s loose monetary policy in that period led to aggressive speculation in domestic stock and real estate, resulting in the prices of assets to the unprecedented level.

As a result, Japan’s property market in the 1980’s was very fragile. Because all the corporate speculation, the collapse wiped out company balance sheets. Therefore, the market fell hard. Through some related materials, since 1991, Japan has spent 11 years to struggle with the recession. It has meaningful signs until now.  

Real Estate Bubble of China

In the previous blogs, I have introduced the definition and possible reasons about the real estate bubbles. So today, I will give an example of real estate bubbles and deeply explore the cause and effect of real estate bubbles.

Without a doubt, China is experiencing the biggest housing bubble of all. I find some related data to prove this point.(See the chart as follows).

Why Shanghai real estate is the most obvious bubble ever? As a Chinese, I think there is no doubt that this phenomenon is connect with Chinese economic environment, the policy of government and people’s perception. Firstly, property values are increasing dramatically and the prices have far above the global standard.  One clear clue is that the average price-to-income ratio has reached 27:1, five times the world average. Therefore, the income of people cannot keep up with the rising property values. Secondly, the bank activities have important impact on the real estate bubbles. Possible contributors include low interest rate, increase bank lending and so on. What is more, except demographic factors, lending has been growing like crazy. I learn that not only residential property, but also commercial real estate is on fire. At last, the government in China is aware of the issue and adopt some measures to prevent it. For example, they warn banks to increase their deposits. But the Chinese government has no attention to rapidly slow the pace of economic growth. All of these factors produce the serious real estate bubble in China.

During this period, many economists and CEO have warned the threat of bubbles. However, because of the increasing urbanization and rising incomes, the trend of housing price continued before 2010. According to report of China, the bubble started to deflate in late 2011 and the housing prices begin to fall. The crucial reason is the government implement some effective measures to control. The Chinese cabinet declare that it will regulate capital flows and require that families who purchase the second house must make at least a 40% down-payment. But is it the end of the real estate bubble in China? Neither I nor experts can convince.

As everybody knows the consequence of the real estate bubbles, it will lead to a temporary boost in wealth and a redistribution of wealth. The people who own several houses will feel themselves very rich. If the people bought houses at high price and sell house at low price, they will get big profit. It’s called macroeconomic significance. We also can expect many negative results through the real estate bubbles before in the world. After bubble, the economic depression and crisis followed. Therefore, I powerful suggest Chinese government find available ways to avoid this aftermath. The government need to combine banks and companies to make measures together. And also the public must cooperate with the government.  

Reference  

 “Why Shanghai Real Estate Is The Most Obvious Bubble Ever”. The Business Insider. 2010-01-13. Retrieved 2010-01-25.

Introduction of real estate bubbles

As we all known, there are many different kinds of bubbles in our economic world. So today, I will firstly focus on real estate bubbles to study. The definition of the real estate bubbles is difficult to state but most people have an agreement on three categories. From the point of price, a real estate bubble is an abnormally high trough-to-peak price rise. What cause this phenomenon? Maybe there is a prolonged increase of income in a period. The second definition is that the price of asset in question to exceed its fundamental value by a large margin. If the participants have an expectation of rapidly increase price of asset in the future, they will buy some assets to invest. However, if prices at any given time reflect all available information, a bubble cannot exist because the houses are all efficiently priced. The last one concentrates on the price of assets to its long-term equilibrium level.

After realise the definition of the real estate bubbles, I will explore the reason of the bubbles. Real estate bubbles may not occur without banking crises. The two economic phenomena are correlated with each other. I want to have an emphasis on the banking system and banking behaviour. The rise in the prise of real estate will contribute to the increase of bank capital. This increases the supply of credit to real estate industry and vice versa.    

Outline of my Blog

In the history, there are several financial bubbles that effect the economic world. Such as the Dutch Tulip Mania in 17th century, South Sea Bubble in 1720 and The Great Depression in 1933. We must demonstrate the definition of the Bubble Economy before explore the reason of the formation and burst.

So what is the Bubble Economy? Over-the virtual capital transactions related to continued growth and expansion of the increasing divorced from physical capital and the growth of industrial sector growth, financial securities, real estate prices, speculative trading is extremely active in economic phenomena. According to consult some related materials we obtain this official explanation. And also we know it is not a positive phenomena in the economic world. It will result in the false social and economic prosperity, the bubble will eventually bust, leading to social turmoil, and even the collapse of the economy.

Therefore, I will analyze some features of the Bubbles in order to study and explore the reason and effect of the Bubbles. Bubbles appeared in many places of the world so I want to focus on one or two regions to discuss and have an comparative analysis. This blog will have an emphasis of two countries in Asia.