Author: Editors, East Asia Forum
The housing market in China has been behaving wildly. Housing prices in China’s major cities are up by 30 per cent on a year ago. The frenzy to purchase property has come to dominate media reporting around the country, with the People’s Dailycapturing a riotat the opening of a new housing development late last month in Hangzhou, where the G20 summit was held just weeks before.
Ma Jun, chief economist at the People’s Bank of China’s research bureau,warnedabout the unsustainability of valuations in the real estate market and the potential fallout from the bubble. ‘Measures should be taken to put a brake on the excessive bubble expansion in the property sector, and we should curb excessive financing into the real estate sector’, Ma says. The central bank’s paper, Financial News, suggests that surging property prices in first-tier and some second-tier cities are the result of inefficient regulation by local governments, and that local governments should effectively control local property markets to prevent bubbles.
Rising property prices, despite the risks, have nonetheless given the economy a boost that’s helped China keep growing, by weaknesses in exports and other areas. Gross domestic product has risen 6.7 per cent over the year as of the third quarter, according to the official data released last Wednesday, meeting market estimates and dampening expectations that there’ll be any further stimulus on top of record low interest rates over the past year.
Construction has been chasing property prices, and with the booming financial sector, holding national product up in the face of weak industrial production. The hope is that manufacturing production is bottoming out and that the property sector can be wound back.
Chinese property prices are no longer just the concern of the young, desperate to secure a home, especially in China’s largest cities. The gyrations of China’s housing market are now of global significance. Investors or speculators, more than ordinary households, shape trends in property markets in cities like Shanghai, Beijing and Guangzhou, and the ripple effects of the psychology in these markets spread far and wide — to London, Vancouver, Sydney and around the world.
The property sector’s impact on investment and consumption (including the household goods that fill new apartments and housing estates to bursting point) is estimated to account for about one-quarter of Chinese GDP. That’s why this year’s recovery in the housing market after the last slump has brought some good news along with growing anxieties for officials. It has helped steady GDP growth at 6.7 per cent, faster than most predicted. It has stabilised demand for raw materials like iron ore and copper, easing the pressure on commodity prices. And it has brought a surge of Chinese investment across global real estate markets.
Yet the next major economic crisis could originate in China. Its economy is a major part of, and is enmeshed in, the global economy via industrial production, commodities trade, finance and real estate investment, among other things. Though it is almost impossible to tell where the next economic crisis will come from, it would not be surprising if it were from a shock in one of these increasingly important markets, given the unprecedented transformation that China is attempting to effect.
The stock market ups and downs are what has grabbed headlines, but these are largely unrelated to the real Chinese economy, both during the wild upswings and the busts. The property market, however, is deeply tied to China’s real economy. And the property bubble is real and large.
In our lead essay this week, Hu Shuli, editor and founder of Caixin Media,explainsthat by some measures, property prices in China are already higher than they were in Japan during the asset bubble at the end of the 1980s and are approaching those in the United States just before its subprime collapse.
At the height of Japan’s asset bubble, the land on which the imperial palace stood in the middle of Tokyo was valued at more than all of California. The bursting of that asset bubble in 1990 and the difficulty in effecting a quick recovery led to the now lost two and a half decades of growth. The advanced economies have not yet recovered from the global financial crisis that was triggered by the loans that fuelled the US property market boom in advance of the subprime crisis.
Hu explains that ‘[t]he main driving force behind China’s rising home prices is reliance on land sales to fill local government coffers. About half of the money generated from land sales now goes to local governments, which currently account for over half of their fiscal revenues. This poses a dilemma for many local governments, who now have an incentive to keep property prices artificially high’. This market, she concludes, is in urgent need of reform, alongside other parts of China’s economy. The Chinese government needs to cut local government reliance on land sales for revenue.
While there is a lot of irrational exuberance in the Chinese real estate market — Hu points out, for example, that divorces have spiked in Shanghai to take advantage of a regulatory loophole that favoured financing first homes — it’s not yet clear that the real estate market will unravel. While there’s a huge squeeze on property in the top four or five cities, the market has risen by only half as much in the next 30 cities, and hardly at all in the rest, where the population is shrinking.
The sanguine call it a problem of imbalance rather than a bubble. Even in Shanghai, there’s a lot of land that could be released to take the pressure off the real estate market. But selling more land in the big cities would hurt important players and choke off a key source of local government revenue.
There are certainly serious problems in the Chinese real estate market and, as Hu says, there is an urgent need to deal with them.
The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel, Amy King and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.
- Cambodia’s condo-ridden housing crisis by Hannah Elten
- Domestic policy challenges for Singapore in an uncertain… by Chia Siow Yue
- Tackling housing unaffordability in post-COVID-19 Asia by Matthias Helble
- The rise and fall of converted housing in urban China by Hal Pawson
- Singapore's approach to housing policy by Sock-Yong Phang
- Thai property gains foreign popularity by Prem Singh Gill
- Is housing doomed to fail in super compact Hong Kong? by Rebecca Chiu
- Putting the brakes on China’s slowdown by Yu Yongding
- Solving Hong Kong’s housing affordability problem by Ngai Ming Yip
- India rethinks ties with China by B R Deepak
- The Indonesian police’s dual function under Jokowi by Made Supriatma
- Press freedom is no joke in the Philippines by Danilo Araña Arao
- India goes its own way on global geopolitics by Deepa Ollapally
- Japanese family law must change by Allison Alexy
- Mongolia walks a tightrope on Ukraine by Mendee Jargalsaikhan
Post a comment
East Asia Forum welcomes comments, both for adding depth to analysis and for bringing up important new issues. Original comments adding insight and contributing to analysis are especially encouraged.
The editors retain the right to refuse and edit comments at any time.
This site uses Akismet to reduce spam. Learn how your comment data is processed.
Tom Van Luven
The most immediate step that needs to be taken in China is to institute a property tax. This would solve two problems: first, it would impose a cost on investors who leave their properties vacant, thereby forcing more properties onto the rental/sales market and causing prices to decline. Second, it would provide local governments with a stable funding source for their ongoing expenses, thereby obviating the need to wasteful, unnecessary projects.
See AlsoServiced Apartments & Aparthotel in Manchester | Princess Street - Roomzzz AparthotelsChina Trains Tickets, Best Rail Booking Service, Realtime ScheduleTop 25 Design Job Titles [with Descriptions]How to Read Japanese(Video) China 2019 - The Global Economic Outlook: View from AsiaThe problem is that China’s government has lost the ability to make big decisions. Introducing a property tax implies ownership, which means discarding an vestige of Maoism. Causing prices to fall will cause well-connected cadres to lose money – and since the CCP has become a wealthy oligarchy, it would essentially be shooting itself in its financial foot.
China’s government officials know all this; they simply lack the courage to make a logical decision that benefits the common people, not just the well-connected bourgeois that currently comprises the CCP membership.
FAQs
How serious is China's housing bubble? ›
China's deflating property bubble is imperiling the world's second-largest economy with effects that could ripple for years. Home prices are dropping in many cities after a long period of increases, data from Chinese real-estate developers and official statistics show.
What is China's real estate problem? ›Real estate prices have plummeted as authorities seek to rein in unsustainable debt and market speculation. Hundreds of thousands of homebuyers are refusing to pay their mortgages for pre-sold properties as developers struggle to complete housing projects on time.
Is China's property market in trouble? ›“China's property downturn has turned into a crisis of confidence that only the government can fix,” S&P said. “If falling sales tip more developers into distressed territory, things will get worse. The distressed firms will halt construction on more pre-sold homes, hitting buyers' confidence further.
What is happening to the Chinese property market? ›The frenetic pace of house building used to be emblematic of China's rise. Now confidence in the model has collapsed. Buyers are dropping out, borrowers are on mortgage strikes and developers face a liquidity squeeze. In July the value of new home sales fell by 29% compared with a year earlier.
What happens if China's housing market collapses? ›The risk from the real estate sector could also spill into the wider economy via banks and local governments, which are the two biggest entities supporting China's growth. Banks lend both to buyers and developers and so could face a surge in bad debts if the housing market collapsed.
Why does China have a housing bubble? ›China's real estate sector has a debt problem. Large property developers like the embattled company Evergrande have racked up massive amounts of debt, leading to construction stoppages and lots of angry homebuyers.
Why is Chinese real estate crashing? ›China's property woes began roughly one year ago, when new government rules caused indebted property giant Evergrande to default on outstanding bonds. The property crackdown spread to other developers as the government aimed to rein in debt and speculation across the sector.
Why are Chinese property developers defaulting? ›So when Chinese officials ratcheted up steps to reduce the risk of a bubble and temper the inequality that unaffordable housing can create, it touched off a crisis that has sent some major developers into default. A sales slump that began during the pandemic was deepened by aggressive measures to contain Covid-19.
Are Chinese property prices falling? ›From a year earlier, prices dropped 2.1%, the most in seven years. China's $2.4 trillion new-home market is showing little signs of recovery, adding to the drag on growth in the world's second-largest economy.
Is it a good time to buy property in China? ›For the past decade, China's housing market has been booming. Home ownership in the country has grown over 80%. Buying property in China can definitely prove to be a great investment.
Is China's economy in Trouble 2022? ›
The World Bank forecast GDP growth in China – the world's second largest economy – of just 2.8% for 2022, while the rest of the 23-country region was expect to grow 5.3% on average, more than double 2021's 2.6% rise.
Do Chinese own their homes? ›"There is no private ownership of land in China. One can only obtain rights to use land. A land lease of up to 70 years is usually granted for residential purposes. Foreigners who have worked or studied in China for at least a year are allowed to buy a home.
Is China facing a financial crisis? ›It is not surprising that China is now facing widespread financial distress, with more to come as the property sector's woes emerge within the financial system. A credit bubble of historic proportions that drove China's growth over the past decade is currently unwinding, and slowing the economy as a result.
How much real estate does China own in the US? ›While China raises concerns over American boots on the ground in Asia, the country continues to grow its own footprint in the U.S. USDA's latest data shows China owns over 191,000 acres of U.S. lands, but that was before a North Dakota land sale this Spring.
How will China's economy affect the US? ›The economic relationship between China and the U.S. is extremely symbiotic. A China slowdown will affect the U.S. in three main areas: trade, the U.S. debt, and the value of the U.S. dollar itself.
Where are Chinese buying property? ›Chinese investors were the most active buyers of US real estate last year among foreigners — spending a record $6.1 billion on homes mainly in Florida and California, according to the National Association of Realtors.
How many vacant apartments are in China? ›Fifty million empty flats threaten to plunge China's troubled property market further into crisis, warns think tank.
Is China property market crashing? ›The Chinese housing market crash is contributing to a rapid slowing of the Chinese economy, which has been the engine of global growth for more than a decade. The World Bank has revised down its forecast for Chinese GDP growth to 2.8% in 2022, down from 8.1% last year.
What happens if China defaults on debt? ›If China ever did call in its debt, it slowly would begin selling off its Treasury holdings. Even at a slow pace, dollar demand would drop. That would hurt China's competitiveness by raising the yuan's value relative to the dollar. At some price point, U.S. consumers would buy American products instead.
How many default Chinese developers are there? ›At the moment, the default rate (actual default plus technical default) of Chinese real estate USD bonds has risen to over 50%.
Is Evergrande the largest property developer in China? ›
...
Evergrande Group.
| Guangzhou Evergrande Center | |
|---|---|
| Traded as | SEHK: 3333 |
| Industry | Real estate |
| Founded | 1996 |
| Founder | Xu Jiayin (Hui Ka Yan) |
The size of China's economy means that disruption in a crucial market - like property - can affect the global financial system. Experts believe contagion is the concern now - banks won't lend if they believe the sector is tanking.
What happens exactly when the 70 year lease runs out on a property in China? ›Property Rights Law (art. 149) states that when the 70-year term for the land-use right for residential purposes expires, the term will “automatically” renew.
How long can you own a house in China? ›“Owning” might not be the right term, as in China, property is simply leased for the duration of 70 years. After this time, the lease is usually renewed. However, the Ministry of Housing and Construction can theoretically nullify your lease at any time if your property is needed for development.
Do Americans own land in China? ›A foreigner can only own one property in China, and that property must be residential. There are additional requirements by province and city. For example, in Beijing, you must pay taxes and social security for at least five years before you are permitted to buy a property.
Who has the largest economy in the world? ›With a GDP of 23.0 trillion USD, the USA is by far the world's largest economy in this ranking for 2021. It is followed by China in second place with a GDP of 17.7 trillion USD. Canada is also quite far ahead in the international comparison and occupies the ninth place in this ranking.
Why China economy is slowing down? ›China's economy is slowing down as it adapts to a punishing zero-Covid strategy and weakening global demand. Official growth figures for the July to September quarter are expected soon - if the world's second-largest economy contracts, that increases chances of a global recession.
Is China's economy growing? ›GDP Annual Growth Rate in China averaged 9.05 percent from 1989 until 2022, reaching an all time high of 18.30 percent in the first quarter of 2021 and a record low of -6.80 percent in the first quarter of 2020.
Can you own a gun in China? ›In the People's Republic of China, access by the general public to firearms is subject to some of the strictest control measures in the world. With the exception of individuals with hunting permits and some ethnic minorities, civilian firearm ownership is restricted to non-individual entities.
Can you own a car in China? ›BUYING A CAR IN CHINA. The government began encouraging private car ownership in 1994. Chinese economic policies are designed to nurture domestic automakers and make car ownership accessible to people who half a generation ago thought themselves lucky to afford a bicycle.
How much does the average Chinese citizen make? ›
| Region Average (2019) | RMB 90,501 | USD 13,231 |
|---|---|---|
| Beijing | 166,803 | 24,386 |
| Shanghai | 149,377 | 21,839 |
| Tibet | 118,118 | 17,269 |
| Tianjin | 108,002 | 15,790 |
The Chinese housing market crash is contributing to a rapid slowing of the Chinese economy, which has been the engine of global growth for more than a decade. The World Bank has revised down its forecast for Chinese GDP growth to 2.8% in 2022, down from 8.1% last year.
Is China's economy collapsing? ›China's economy is slowing down as it adapts to a punishing zero-Covid strategy and weakening global demand. Official growth figures for the July to September quarter are expected soon - if the world's second-largest economy contracts, that increases chances of a global recession.
What happens when a housing bubble bursts? ›Once speculators recognize that housing prices are on the rise, they enter the market as well, further driving up demand. The phenomenon is called a bubble because inevitably, at some point, it will burst. Typically, it bursts when interest rates start to rise again, wiping out demand.
Is China's economy falling? ›China's economy is slowing, with annualized GDP growth falling to 0.4% for April–June 2022, its second lowest level since 1992. Economic recovery is being hampered by the combined effects of COVID and a falling property market.
Why is Chinese real estate crashing? ›China's property woes began roughly one year ago, when new government rules caused indebted property giant Evergrande to default on outstanding bonds. The property crackdown spread to other developers as the government aimed to rein in debt and speculation across the sector.
Is China's economy in Trouble 2022? ›The World Bank forecast GDP growth in China – the world's second largest economy – of just 2.8% for 2022, while the rest of the 23-country region was expect to grow 5.3% on average, more than double 2021's 2.6% rise.
Why China property crisis? ›The snowballing of the current housing crisis can be traced back to the 2021 fall of China's second-largest real estate developer in terms of total sales— the Evergrande Group. The conglomerate breached all three debt thresholds in the red lines system and defaulted on its whopping $300 billion debt.
Does China have a good economy? ›China's economy has grown to one of the largest and most powerful in the world over the past few decades. Driven by industrial production and manufacturing exports, China's GDP is actually now the largest in terms of purchasing power parity (PPP) equivalence.
What is China's economy today? ›| Statistics | |
|---|---|
| GDP | $20.25 trillion (nominal; 2022 est.) $30.18 trillion (PPP; 2022 est.) |
| GDP rank | 2nd (nominal; 2022) 1st (PPP; 2022) |
| GDP growth | 2.3% (2020) 8.1% (2021) 3.2% (2022f) 4.4% (2023f) |
| GDP per capita | $14,345 (nominal; 2022) $21,364 (PPP; 2022) |
Is China's GDP growing? ›
Gross domestic product (GDP) in the world's second-biggest economy rose 3.9 percent in the July-September quarter year-on-year, official data showed on Monday, above the 3.4 percent pace forecast in a Reuters news agency poll of analysts, and quickening from the 0.4 percent pace in the second quarter.
Should you buy a house when the market crashes? ›Is Buying A Home During A Recession Worth It? In general, buying a home during a recession will get you a better deal. The number of foreclosures or owners who have to sell to stay afloat increases, typically leading to more homes available on the market and lower home prices.
What is the problem with a bubble? ›Because speculative demand, rather than intrinsic worth, fuels the inflated prices, the bubble eventually but inevitably pops, and massive sell-offs cause prices to decline, often quite dramatically. In most cases, in fact, a speculative bubble is followed by a spectacular crash in the securities in question.
Is a housing bubble good for buyers? ›If we are in a housing bubble, and the bubble pops, home values will crash. You may find your home isn't worth the amount you still owe. Being underwater could make it harder for you to sell and move without taking a loss. The best thing you can do now is avoid getting stuck with a mortgage you can't afford.
Are we in a recession 2022? ›The U.S. has already experienced two consecutive quarters of negative GDP growth in 2022, which some people consider to be a recession. But others are waiting for the National Bureau of Economic Research to make the final call—and it has yet to do so.
Is China facing banking crisis? ›It is not surprising that China is now facing widespread financial distress, with more to come as the property sector's woes emerge within the financial system. A credit bubble of historic proportions that drove China's growth over the past decade is currently unwinding, and slowing the economy as a result.
Is there a banking crisis in China? ›China's financial crises is getting worse. In this latest phase, Chinese banks, anticipating huge loan losses, have taken dramatic steps to enhance their loan loss reserves, tapping China's bond markets for some 30 percent more funds than they did last year. The banks' problems are hardly a surprise.