Its bursting can harm the real economy and can cause negative spillovers to other nations
By CHRISTIAN DREGER AND YANQUN ZHANG 26 July 2011
For many observers, the Chinese economy has been spurred by a bubble in the real estate market, probably driven by the fiscal stimulus package and massive credit expansion. For example, the stock of loans increased by more than 50 per cent since the end of 2008.
In reaction to the global crisis, the government urged banks to increase lending. Mortgage loans have played a significant role, as they account for one-third of total lending activities.
Banks have provided easy credit for housing development, probably without sufficient evaluation of risks. In addition, state-owned enterprises have stimulated the development, having access to low-cost capital and believing they are too big to fail.
There are several indications that the market might have overheated in recent years. In some cities, buyers are picked up by the seller in a lottery. The rapid increase in house prices triggers exuberant expectations and speculation.
Some real estate developers have started hoarding houses by delaying their sales hoping for higher profits. Due to higher price expectations, families are stretching to pay prices at the edge of their means or beyond.
To dampen the evolution, the People’s Bank of China has increased its nominal interest rate. The Chinese government has also introduced measures to combat record prices, including mortgage rates and down-payment requirements for second homes. In some cities, house owners are restricted in new house purchases. Many state-run mortgage lenders have cut mortgage discounts. Additional taxes on property are in the pipeline.
While housing prices in the first-tier cities stopped rising further, they are still at record levels. Housing prices are not only a problem from an economic perspective, they’re also an issue of the people’s livelihood that can affect social stability. Households with average income increasingly feel that they cannot afford to buy a house.
A bursting of a house-price bubble can be harmful for the real economy. Due to the low leverage, the risk that people are not able to fund their mortgage commitment might not be very high. However, housing investment accounts for 10 per cent of gross domestic product (GDP), and is crucial for economic growth.
Because of the integration of China into the world economy, a bursting bubble can cause negative spillovers to other countries, particularly in the Asian region. The challenge for the government is to stamp out speculative activities without killing an engine of GDP growth.
While accelerating house prices may indicate the presence of a bubble, its existence is rather controversial. Urbanisation trends, rising incomes and low interest rates may all have triggered the rising prices. The ongoing trend for smaller families may have created strong demand.
For many Chinese, especially for young couples, renting an apartment is not very popular. The regulation system does not give tenants much protection. Renters will lose their apartments if the home owner decides they want the building for a different use.
Due to fast economic growth, millions of Chinese join the middle class each year, thereby contributing to high housing demand. Because of high saving rates, many households are able to buy a house with cash and are independent of mortgage loans.
In addition, the uneven development across the regions has enhanced the housing demand in first-tier cities where there are better living conditions, more job opportunities and better public resources. Overall, high house prices may be in line with the fundamental socio-economic factors.
In recent research, we used a dataset for 35 major cities to estimate the size of the bubble relative to an equilibrium level. Our results indicated the presence of a house-price bubble. We showed that increasing imbalances have emerged over the past two years. For example, real house prices in Shanghai have been 28 per cent above the long-run equilibrium in 2008, and 35 per cent in 2009.
While the evidence is similar for Beijing, the increase is more spectacular in Shenzhen. Real house prices were overvalued by 66 per cent in 2009, after 23 per cent in 2008. In general, the bubble is more pronounced in the special economic zones and the south-eastern coastal regions.
Overall, the size of the bubble was 20 per cent in 2008 and 25 per cent in 2009, regardless of whether GDP or population weights are applied.
Further analysis indicates that changes in real house prices cause inflation, but not vice versa. In contrast, there is no causality from house prices to GDP growth. Therefore, a decline in house prices may contribute to a lower inflationary environment without huge negative effects on real economic development.
Christian Dreger is professor for macroeconomics, European University Viadrina, and head, Department for Macroeconomics, DIW Berlin. Yanqun Zhang is senior economist, Institute of Quantitative and Technical Economics at the Chinese Academy of Social Sciences, Beijing. This comment is an edited version of an article sourced from Vox.Eu.org, a Web portal that features the views of prominent economists
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Yes, there’s a property bubble in China
Its bursting can harm the real economy and can cause negative spillovers to other nations
By CHRISTIAN DREGER AND YANQUN ZHANG
26 July 2011
For many observers, the Chinese economy has been spurred by a bubble in the real estate market, probably driven by the fiscal stimulus package and massive credit expansion. For example, the stock of loans increased by more than 50 per cent since the end of 2008.
In reaction to the global crisis, the government urged banks to increase lending. Mortgage loans have played a significant role, as they account for one-third of total lending activities.
Banks have provided easy credit for housing development, probably without sufficient evaluation of risks. In addition, state-owned enterprises have stimulated the development, having access to low-cost capital and believing they are too big to fail.
There are several indications that the market might have overheated in recent years. In some cities, buyers are picked up by the seller in a lottery. The rapid increase in house prices triggers exuberant expectations and speculation.
Some real estate developers have started hoarding houses by delaying their sales hoping for higher profits. Due to higher price expectations, families are stretching to pay prices at the edge of their means or beyond.
To dampen the evolution, the People’s Bank of China has increased its nominal interest rate. The Chinese government has also introduced measures to combat record prices, including mortgage rates and down-payment requirements for second homes. In some cities, house owners are restricted in new house purchases. Many state-run mortgage lenders have cut mortgage discounts. Additional taxes on property are in the pipeline.
While housing prices in the first-tier cities stopped rising further, they are still at record levels. Housing prices are not only a problem from an economic perspective, they’re also an issue of the people’s livelihood that can affect social stability. Households with average income increasingly feel that they cannot afford to buy a house.
A bursting of a house-price bubble can be harmful for the real economy. Due to the low leverage, the risk that people are not able to fund their mortgage commitment might not be very high. However, housing investment accounts for 10 per cent of gross domestic product (GDP), and is crucial for economic growth.
Because of the integration of China into the world economy, a bursting bubble can cause negative spillovers to other countries, particularly in the Asian region. The challenge for the government is to stamp out speculative activities without killing an engine of GDP growth.
While accelerating house prices may indicate the presence of a bubble, its existence is rather controversial. Urbanisation trends, rising incomes and low interest rates may all have triggered the rising prices. The ongoing trend for smaller families may have created strong demand.
For many Chinese, especially for young couples, renting an apartment is not very popular. The regulation system does not give tenants much protection. Renters will lose their apartments if the home owner decides they want the building for a different use.
Due to fast economic growth, millions of Chinese join the middle class each year, thereby contributing to high housing demand. Because of high saving rates, many households are able to buy a house with cash and are independent of mortgage loans.
Soaring demand
In addition, the uneven development across the regions has enhanced the housing demand in first-tier cities where there are better living conditions, more job opportunities and better public resources. Overall, high house prices may be in line with the fundamental socio-economic factors.
In recent research, we used a dataset for 35 major cities to estimate the size of the bubble relative to an equilibrium level. Our results indicated the presence of a house-price bubble. We showed that increasing imbalances have emerged over the past two years. For example, real house prices in Shanghai have been 28 per cent above the long-run equilibrium in 2008, and 35 per cent in 2009.
While the evidence is similar for Beijing, the increase is more spectacular in Shenzhen. Real house prices were overvalued by 66 per cent in 2009, after 23 per cent in 2008. In general, the bubble is more pronounced in the special economic zones and the south-eastern coastal regions.
Overall, the size of the bubble was 20 per cent in 2008 and 25 per cent in 2009, regardless of whether GDP or population weights are applied.
Further analysis indicates that changes in real house prices cause inflation, but not vice versa. In contrast, there is no causality from house prices to GDP growth. Therefore, a decline in house prices may contribute to a lower inflationary environment without huge negative effects on real economic development.
Christian Dreger is professor for macroeconomics, European University Viadrina, and head, Department for Macroeconomics, DIW Berlin. Yanqun Zhang is senior economist, Institute of Quantitative and Technical Economics at the Chinese Academy of Social Sciences, Beijing. This comment is an edited version of an article sourced from Vox.Eu.org, a Web portal that features the views of prominent economists
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