Friday, July 23, 2010

The gurgle in the Chinese real estate market

A housing booms can soon enlarge into bubbles and become a source of great risk to the economy has been amply proved by the financial crisis. Everybody knows that the crisis started with a housing boom in the US. The Chinese government definitely believes that a similar bubble has developed in its country, which is why it has cracked down hard on its real estate sector. But how big is this bubble? How far have real estate prices gone up in China? These are the questions addressed by Jing Wu, Yongheng Deng and Joseph Gyourko.

Here are a hardly any startling facts the researchers have unearthed. Land values, adjusted for price rises and differences in quality, have shot up by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years. House prices, after adjusting for inflation, have enlarged by 225% in 35 main Chinese cities, with 60% of that, or 140 percentage points, being the increase since the first quarter of 2007. What’s more, prices have increased 41% this year. It’s no revelation then that the Chinese government is so troubled about overheating in real estate.

Price to rent ratios, too, have risen penetratingly in many cities, with the ratio mounting by almost 75% in the last three years in Beijing. Prices have risen faster than rents in all major cities and the ratio is a very high 45.9 in Beijing. The reason for such a skewed ratio is that home buyers are assuming large capital gains on their purchases.

This real estate bubble could have on the banking sector. From the end of 2008, outstanding loans on inhabited mortgages have increased by 38% and loans to real estate developers by 50%. While Chinese house owners have higher levels of their own money in their homes than Americans, the fact remains that “even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing.”

And lastly, think about how imperative the housing market is for China’s economy. The manufacture industry accounts for “5.7% of Chinese GDP; it employs 14.3% of all workers in urban areas; and it consumes about 40% of all steel and lumber produced in China

Evaluating circumstances in Major Chinese Housing Markets - By Jing Wu, Joseph Gyourko and Yongheng Deng, NBER working paper

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