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.