73rd International Atlantic Economic Conference

March 28 - 31, 2012 | Istanbul, Turkey

China's real estate bubble

Saturday, 31 March 2012: 2:15 PM
Sung Sohn, PhD , Business and Economics, California State University, Los Angeles, CA
                                                       China’s  Real Estate Bubble

Along with commodity inflation, China is  struggling with real estate inflation.  Real estate prices in China increased 11.7 percent in July from one year earlier.  This is following the string of double-digit real estate price increases that has led many to refer to the housing situation as a “real estate bubble.”  The real estate bubble in China has led to social unrest, as many citizens are angry that they are unable to afford to buy a home.   Apartments in Beijing are affordable to only the top 20 percent of earners, while a square meter of property in China costs an estimated 164 times per-capita income.

The high housing prices in China is mostly due to the government’s privatization of some urban housing in 1998.  The issue is also the product of China's massive stimulus spending and lending of 2009 and 2010, which resulted in land purchases and drove up prices unsustainably.   To fight the effects of the global downturn, Chinese state-owned banks lent about $3 trillion to mostly state-owned enterprises. While the money financed largely infrastructure projects, many of the loans were used to finance real-estate purchases instead. 

The Chinese government began has taken actions to prevent speculation and cool down the real estate market by reducing housing prices.  These policies were aimed in limiting overinvestment, and included increases in down payments and property taxes.  Down- payments for first homes are up to 30 percent, while down payments for second homes are up to 60 percent.  The government also launched state-subsidized apartments to provide housing to citizens who cannot afford to buy a home. 

While policy efforts have been successful in reducing real estate prices, some worry that the Chinese economy may be slowing more rapidly than anticipated.  Real estate has been the backbone to China’s economic growth, with property construction alone estimated in accounting for 12% of the nation’s GDP.  By some estimates, half of China’s GDP is linked to real-estate related activities.  The health of Chinese real estate is also crucial to China's construction, steel and cement sectors, and prices for key industrial metals used in construction have already begun to soften.  For this reason, there is worry that a fall in housing and apartment prices would have profound consequences for Chinese industry and investment, and lead to a rapid slowdown for the economy.

Further, since state-owned enterprises used loans to purchase property, they have taken on heavy real-estate debt.  A burst in the real estate bubble means that the fall in prices could produce an overwhelming number of nonperforming loans.  Therefore, many fear that a burst in the real estate market in China could lead to a banking crisis which would drastically undermine the Chinese economy. 

Will government’s policy efforts be successful in taming the real-estate bubble?  Could the bubble break and lead to a significant economic slowdown in China impacting the global economy? Since China is the primary locomotive pulling the global economy, its impact would be huge.