Chinese property bubble
Encyclopedia
The Chinese property bubble is an alleged ongoing real estate bubble
in residential and/or commercial real estate in the People's Republic of China
. The phenomenon has seen average housing prices in the country triple from 2005 to 2009, possibly driven by both government policies
and Chinese cultural attitudes.
High price-to-income and price-to-rent ratios for property and the high number of unoccupied residential and commercial units have been cited as evidence of a bubble. Critics of the bubble theory point to China's relatively conservative mortgage lending
standards and trends of increasing urbanization
and rising income
s as proof that property prices are justified.
raised interest rates for the third time this year
A new nationwide real estate sales tax
was introduced in China in late 2009 as a measure to curb speculative investing.
In early 2010, the Chinese cabinet announced it would monitor capital flows to "stop overseas speculative funds from jeopardizing China's property market" and also begin requiring families purchasing a second home to make at least a 40% down-payment.
A mortgage discount for first-time property buyers – which had offered fixed, 5% 20-year mortgages at just above 4% – was also eliminated.
In early 2011, Beijing banned the sale of homes to those who have not lived in Beijing for five years. Beijing also limited the number of homes a native Beijing family could own to two, and allowed only one home for non-native Beijing families.
Real estate bubble
A real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets...
in residential and/or commercial real estate in the People's Republic of China
Real estate in the People's Republic of China
Real estate in the People's Republic of China is developed and managed by public, private, and state-owned red chip enterprises. Currently the market is experiencing tremendous growth and the central government has implemented measures to tighten interest rates, increase deposit and impose...
. The phenomenon has seen average housing prices in the country triple from 2005 to 2009, possibly driven by both government policies
Government of the People's Republic of China
All power within the government of the People's Republic of China is divided among three bodies: the People's Republic of China, State Council, and the People's Liberation Army . This article is concerned with the formal structure of the state, its departments and their responsibilities...
and Chinese cultural attitudes.
High price-to-income and price-to-rent ratios for property and the high number of unoccupied residential and commercial units have been cited as evidence of a bubble. Critics of the bubble theory point to China's relatively conservative mortgage lending
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
standards and trends of increasing urbanization
Urbanization in China
Urbanization in the People's Republic of China increased in speed following the initiation of the reform and opening policy. By the end of 2010, the mainland of the People's Republic of China had a total urban population of 665.57 million or 49.68 percent of the total population.The rural-to-urban...
and rising income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
s as proof that property prices are justified.
For bubble
- Chinese property developers are now experiencing their own credit crunch due to Chinese governmentChinese governmentThe phrase "Chinese government" may refer to:- Contemporary :* Government of the People's Republic of China * Government of the Republic of China - Historical :* Chinese dynasties* Beiyang Government...
funding restrictions and fire sales are expected which will reduce prices rapidly and individual property loans are also drying up - Significant numbers of vacant or under-performing commercial and residential properties and the continued construction of property despite these facts, including an estimated 64 million vacant apartments.
- High price-to-income ratios for real estate, such as in BeijingBeijingBeijing , also known as Peking , is the capital of the People's Republic of China and one of the most populous cities in the world, with a population of 19,612,368 as of 2010. The city is the country's political, cultural, and educational center, and home to the headquarters for most of China's...
where the ratio is 27 to 1 years , five times the international average(27 to 1 is based on a double income household so 54 to 1 for a single income household of roughly 6,500USD/yr) - High price-to-rent ratios for real estate, such as in Beijing where the ratio is 500:1 months compared to the global ratio of 300:1 months Homes are readily available in the Minneapolis area for 100 times the monthly rent
- A weak secondary market for Chinese homes, with the ratio of secondary to primary residential property transactions at 0.26 for the first half of 2009 (four times as many new home purchases as secondary sales). Comparably, Hong KongHong KongHong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
had a ratio of 7.25, and the U.S. had a ratio of 13.45. - Chinese companies in the chemical, steel, textile and shoe industries opening real estate divisions, expecting higher returns than in their core businesses
- Residential housing investment as a share of China's GDP has tripled from 2% in 2000 to 6% in 2011, similar to the peak of the U.S. housing bubble.
Against bubble
- Home prices slowing or falling in Chinese cities.
- Trends of increasing urbanizationUrbanizationUrbanization, urbanisation or urban drift is the physical growth of urban areas as a result of global change. The United Nations projected that half of the world's population would live in urban areas at the end of 2008....
and rising incomes in China that could continue to support real estate prices - Comparatively conservative mortgageMortgage loanA mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
lending practices, particularly in contrast to those at the height of the United States housing bubbleUnited States housing bubbleThe United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
City statistics
- ShanghaiShanghaiShanghai is the largest city by population in China and the largest city proper in the world. It is one of the four province-level municipalities in the People's Republic of China, with a total population of over 23 million as of 2010...
- Real estate prices increased by over 150% between 2003 and 2010
- TianjinTianjin' is a metropolis in northern China and one of the five national central cities of the People's Republic of China. It is governed as a direct-controlled municipality, one of four such designations, and is, thus, under direct administration of the central government...
- Projected to have more prime office space than can be absorbed in 25 years at the current rate
Supporting bubble theory
- Standard & Poor'sStandard & Poor'sStandard & Poor's is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices, the US-based S&P 500, the Australian S&P/ASX 200, the Canadian...
has downgraded its outlook for ChinaChinaChinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...
real estate development sector to negative from stable, following a tightening of credit conditions in the country and slower sales. - Cao Jianhai, professor at the Chinese Academy of Social SciencesChinese Academy of Social SciencesThe Chinese Academy of Social Sciences , established in 1977, is the premier and highest academic research organization in the fields of philosophy and social sciences as well as a national center for comprehensive studies in the People's Republic of China. It was described by Foreign Policy...
, who was quoted in an April 2009 report saying "Prices may not fall in the near term but I expect a collapse starting next year, followed by many years of stagnation." - Andy XieAndy XieAndy Xie is an independent economist based in Shanghai, and the former Morgan Stanley star chief Asia-Pacific economist famous for his contrarian and provocative views. He left Morgan Stanley abruptly in October 2006 when an internal email that he penned was leaked out...
, independent Shanghai economist, who was quoted in a March 2010 report saying "China's property market is a massive bubble." - Zhang XinZhang Xin (businesswoman)Zhang Xin is a businesswoman from Mainland China. Presently, she is the CEO of SOHO China, the largest real estate developer in Beijing.Her parents returned to China from Burma in the fifties and worked as translators at the Bureau of Foreign Languages...
, CEO of Beijing real estate developer SOHO ChinaSOHO ChinaSOHO China Limited , founded in 1995, is the largest real-estate developer in Beijing, China . The company is incorporated in Cayman Islands. The founders are Pan Shiyi , a former Oil Ministry employee, and his wife Zhang Xin , a former Goldman Sachs employee...
, who was quoted in a January 2010 report saying "We don’t really have a view on when it will end; [but] we do have a view that this is a bubble." Ms. Zhang does not expect a significant drop in pricing.
Opposing bubble theory
- The World Bank, which said in a November 2009 report that Chinese home prices had not outpaced increases in incomes on a nationwide level, therefore dispelling worries of a looming bubble. However, in its March 17, 2010 quarterly report, the group said China needed to raise interest rates to contain the risk of a property bubble.
- On April 6, 2011 the Economist Intelligence UnitEconomist Intelligence UnitThe Economist Intelligence Unit is part of the Economist Group.It is a research and advisory company providing country, industry and management analysis worldwide and incorporates the former Business International Corporation, a U.S. company acquired by the parent organization in 1986...
’s Access China service released a follow up report to the October 2010 report ‘CHAMPSCHAMPSCHAMPS is an acronym that represents the top 20 emerging cities in China. It was coined in October 2010 by Stephen Joske, Director, China Forecasting, for the Economist Intelligence Unit...
: China’s fastest-growing cities’ entitled ‘Building Rome in a day: The sustainability of China’s housing boom. The report forecasts the population and average income in close to 300 Chinese cities, and the subsequent demand for housing in China which during the next decade. The report states that ‘with China’s property market being an important global economic indicator, China’s housing boom will present opportunities for investors in sectors such as furniture, cars and building materials.’ Regarding China’s urban population, the report forecasts that between 2011 and 2020 it will ‘increase by 26.1% or over 160 million people, while urban per head disposable incomes will increase by 2.6-fold to 51,310 RMB (about US$7,500 at current exchange rates).’
Alleged causes
- Low interest rates and increased bank lending, beginning in 2003 under Wen Jiabao which allowed cheap credit for the construction and purchase of property while making competing debt investments less appealing
- Local government reliance on land sales for income (accounting for up to 50% of revenue), incentivizing the continued sale and development of land
- Limited access to foreign investments for Chinese citizens, increasing the appeal of domestic investments such as property
- Spending from the China economic stimulus program finding its way into real estate
- Cultural pressures encouraging home ownership, particularly for men seeking a wife
Government response
In July 2011 the Chinese GovernmentChinese government
The phrase "Chinese government" may refer to:- Contemporary :* Government of the People's Republic of China * Government of the Republic of China - Historical :* Chinese dynasties* Beiyang Government...
raised interest rates for the third time this year
A new nationwide real estate sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
was introduced in China in late 2009 as a measure to curb speculative investing.
In early 2010, the Chinese cabinet announced it would monitor capital flows to "stop overseas speculative funds from jeopardizing China's property market" and also begin requiring families purchasing a second home to make at least a 40% down-payment.
A mortgage discount for first-time property buyers – which had offered fixed, 5% 20-year mortgages at just above 4% – was also eliminated.
In early 2011, Beijing banned the sale of homes to those who have not lived in Beijing for five years. Beijing also limited the number of homes a native Beijing family could own to two, and allowed only one home for non-native Beijing families.
See also
- Real estate in the People's Republic of ChinaReal estate in the People's Republic of ChinaReal estate in the People's Republic of China is developed and managed by public, private, and state-owned red chip enterprises. Currently the market is experiencing tremendous growth and the central government has implemented measures to tighten interest rates, increase deposit and impose...
- Dwelling NarrownessDwelling NarrownessDwelling Narrowness , also known literally as Snail House, was a 2009 television series broadcast in Mainland China, based on a 2007 novel of the same name. It depicts two sisters struggling with life in Jiangzhou, a fictional city that strongly resembles present-day Shanghai...
- Nail houseNail houseA nail house is a Chinese neologism for homes belonging to people who refuse to make room for development. The term, a pun coined by developers, refers to nails that are stuck in wood, and cannot be pounded down with a hammer.-Historical background:In the People's Republic of China, during most...
External links
- Ghost town, Mongolia: Inside China's empty cities Duff McDonald, December 21, 2010 Fortune Magazine/CNNCNNCable News Network is a U.S. cable news channel founded in 1980 by Ted Turner. Upon its launch, CNN was the first channel to provide 24-hour television news coverage, and the first all-news television channel in the United States...
- Real estate bubble in China? - Part 1, Part 2 (video)
- China's Empty City (video)
- Utopia, Part 3: The World’s Largest Shopping Mall (video)