In the past few months, the debate surrounding China’s housing bubble has become increasingly controversial. Many fear that the housing bubble is about to burst, and some argue that this process has already begun. Further adding to the debate, house prices in China reached a record high this August, in a property market that was estimated at 115 trillion yuan (or $18.8 trillion) at the end of 2012.
The debate follows on from various comparisons to the American real estate bubble, as there are fears of a similar collapse in the Chinese real estate market. However, this western concept of a ‘bursting bubble’ cannot necessarily be applied to China due to inherent differences in the structure of society.
China’s housing bubble may not burst like it did in the United States, as China’s sheer size poses issues of generalization between differently sized cities and differently structured regions. Li Tie, an official with China’s National Development and Reform Commission, argues that a nationwide property bubble is not likely to occur, but that the property bubble may burst in separate regions.
In first-tier cities, like Beijing, Shenzhen and Shanghai, the property market is aiding economic growth tremendously, and the real estate sector accounts for an enormous proportion of Chinese investment. Real estate in China has made up more than 60 percent of household assets since 2008. However, besides household investment, economic activity within this sector also incorporates vast amounts of investment from high-end developers.
This means that fluctuations in housing prices affect a large part of the population on top of corporations. Newly built home prices in China’s major cities rose more than 10% in July when compared to the year before, which stands in opposition to a more than 10% drop in the Shanghai Composite Index (SHCOMP) from the same time period. In fact, the three largest cities, Shanghai, Beijing and Shenzhen, measured property price increases of between 15% and 19% last year, measuring well above the national average of 8.3% as measured by the National Bureau of Statistics.
Many argue that the lack of developed financial institutions and markets are to blame for China’s over-reliance on property in terms of investment. People are more likely to invest in property, with returns much higher than in other equities. This is an obstacle to China as it attempts to rein in and restrict increases in housing prices to avoid bursting the property bubble, especially in the larger cities.
This will be a challenging task as China’s stock market has been stagnant for almost five years, and it has a very low rate of bank deposits, demonstrating a lack of confidence in these investment options. This lack of confidence is especially clear when compared to investment rates in the real estate market.
The main issue will be when demand for properties start to wane, which Economist Andy Xie argues demonstrates the beginning of the end to the housing bubble. This is arguably already clear in China, as demand and sales of houses in second and third-tier cities has already started to fall, with economic stagnating at less than 8% for the past five quarters, for the first time in at least 20 years.
However, fear of the bursting of the housing bubble is exaggerated, as urbanisation rates should allow for a sustained high demand for housing in cities. This is especially true for China’s first-tier cities, which still attract large numbers of new residents. China has also planned to attract even more urban citizens by expanding and improving construction plans, like underground sewage systems, gas pipes, power grid upgrades, heating systems as well as public healthcare.
Critics attack the Chinese government for keeping up the appearance of a booming property market, as citizens keep investing in housing unaware of the risks of a potential housing bubble. Regardless, the transformation of China’s, and especially first-tier cities’, property markets into market-oriented ones may not ensure that they are sustainable. As property policy is not expected to change dramatically in the foreseeable future, the trend of investing in housing over other equities is likely to continue.