In the
previous blogs, I introduced the real estate bubble of China and Japan. Now I
will have a comparative analysis about the two countries and summarize the
reasons and effect of the bubbles.
From the two
cases, we know that the key indicator of the real estate bubbles is housing
prices. And then what fuel the prices? One
of the most important reasons is low interest rate. Many banks will lower
interest rate to stimulate the economy. The price of real estate will become
cheap and improve the people’s desire to purchase. The demand will be improved.
On the other hand, speculators have function of catalysis. When they enter the
market, they believe profits can be obtained in a short time. This further
drives demand. What is more, under the combination of very low interest rate
and a loose of credit standard, much more borrowers will enter the market and
improve the demand. Another reason,
the purpose of the purchasing is not for shelter but for speculation. People
believe that the prices of the real estate must go up consistently and they
will buy a lot of houses to wait them appreciation. It will lead to too much
home ownership. At last but not least, the price and people’s expectation must
be affected by the economic environment and government policy. For example, the
government adopts housing tax policy that can encourage people to buy expensive
and fully mortgaged homes.
As we all
know, no matter what kind of bubbles, the final result of the bubbles is burst.
How did the real estate bubbles burst? According to the two examples, because
the country will operate without crippling inflation, the interest rate must be
raised. Therefore, the more expensive to borrow the money, the less people will
buy the house. The housing market begins to slow and the housing bubbles will
burst. After this process, the economy of this country will enter into the
depression period like Japan. A large number of real estate that prepared for
speculation during bubbles will sit vacant. However, when finished the
difficult time, the market seems like to get back to the equilibrium and prices
will return to fair market value and develop along the normal track.
