Real Estate Bubble in China: the Present and the Future

The concern everywhere whether main trim back mainland China is experiencing a truly acres bubble has increased, especially after Dubai crisis happened. The construction argona of two residential and commercial properties has increased by al well-nigh 6 times since year of 2000. China has enjoyed a sharp increase in prop price since 2006. Especially, after 2009, due to the large stimulus package, legal age of the money went to construction and accredited country industry. It further pushed up the post price, leading to a vauntingly bucks families became the slave of the quality who were struggled to cook up the owe.Not save the high price has goed most battalions lives in China, it could also greatly affect Chinese thriftiness and thus far the global economy. Domestically, the successfulness of real the three estates industry is fuelled by local anesthetic anesthetic investing funds and behind band loan. According to MSN Money, on that point is an increase of 38. 2% from 2010 in airplane propeller commercialise , mainly from developers and speculators. The scale of loans goes to property market is tied(p) more scary, up to $1. 3 trillion. People devour compared the real estate bubble of China to the joined States. The psyche is go out Chinese property bubble has the similar effect?Fortunately, the difference between China and the United States are quite striking. The factors lead to the collapse of property market in United States go out un standardisedly to happen. In China, a country with high saving rate, nation used to buy property in cash 4 or 5 years ago. point in the heyday of residential mortgages, the loan is not as easy as in the U. S. Down payment amount is more than higher than in the U. S. A decline of 20 to 30 % in prices result not permit the bubble burst in China. In conclusion, the burst of real estate bubble is not easy in China and, if happened, bequeath cause limited effect to the world economy.In this pape r, I will try to present the whole picture of Chinese real estate market from the current speckle to how it evolves, and will touch on the future as well. This will be achieved with the help of some(prenominal) information and the explanations of ratios. Section II A Real Estate Bubble in China? The first question rents to be answered is that is there a real estate bubble in China? Since political relation tries to avoid this sensitive word bubble, and entropy are not reliable. People have to gauge them out and estimate how large the bubble is. Bubble is believed to exist in many study cities of China.For example, in Beijing, real estate prices rose by 350% to 900 % only in 7 years from 2003 to 2010(Figure 1). Other indicators of real estate bubble have reached an alarming status in China in many major cities, including Beijing, Shanghai , Nanjing , Hangzhou and so on. The even striking fact in China is that you can hear stories active free cities very often. China has the second largest mall empty in southeast China, and modern empty city in Ordos. These are only the cases that you know and easy to identify. However, more empty streets or blocks are in the cities, waiting for passel to move in.Ghost City Ordos the famous empty city in China is Ordos, which is located in the north part of China. Ordos is the second richest city in China, followed by Shanghai, even richer in term s of per capita than Beijing. The city is rich because of abundant natural resources. One sixth of Chinas coal reserve, one third of it is natural gap reserves. The GDP has increased at 25% per year, much higher than the national level. With such a huge amount of money, local government wants to extract more people to stay in Ordos. This is how the empty city comes from.The new city was designed to restrain 300, 000 people, with a capacity of holding 1 billion people. Currently, you can hardly see any people on the street, even though most of the properties have been sold out. Surprisingly, the city is still under construction. The local government still believes that they can fill in the new city soon. Unfortunately, the stories about empty cities have been repeated on and on in China. This has been interpreted as a sign of over investment and real estate bubble.In the case, the apartments have all been sold out, even though nobody moves in. ecause most people believe that property will grow definitely. For investment pur stick to, most of them prefer to buy one. This mannikin of behavior has contri saveed to the high nothingness rate in China, steep Vacancy Rate since official data are not reliable, the concrete number of vacancy rate is not available from official sources. The cause for this has been that government officials said that, they dont know what vacancy rate means. Obviously, government is trying to avoid knowing the fact. Somehow, people have provided a rough estimate on the vacancy rate.They are using how many electric automobile meters that have no readings for 6 months as an indicator of vacancy rate. Overall, we got a number of 65. 4 million apartments. It is estimated that the vacancy rate is as high as 36%. With such a high vacancy rate, people are wondering how large the real estate bubble in China will be. James S. Chanos, one of the first foresee the collapse of Enron and earn large profit from hedge fund, gave the answer, it will be Dubai times 1000. A growing number of economists and hedge funds managers have been believed that Chinese economy is a big bubble.Others argue that China is definitely not a bubble, the development is real. there is heat in some expanse, but infrastructure construction is still necessary to a country like China with such a huge population. Still, a lot people live in area without roads. The film of properties is still more than the supply of apartments, due to the urbanization and economic ripening. The pent up motive from city dwellers for better living condition , in the future, will convert to real development in economy.Even in 2009, when residential property prices enjoy a high fluctuation, the construction area has increased by 40. 7%, largely due to the central governments stimulus financial package. Figure 4 Section III , What are the forces that push up the price? In China, it is more than market demand and supply that determine the price . Local government, individual investors, and central banks are also involved, which make the let go more complicated. Recent years increase in property price has created an impression that real estate market will keep growing in the future.Unfortunately, this is also the belief in the U.S. real estate market which, ultimately, results in economic recession. Thus, almost everybody bet on the future of real estate market. In this section, I will analyze both the market reasons and social factors that contribute to present situation in China. In terms of market demand, the demand for property comes f rom two kinds of groups. One is from the new migrants from rural places in China. Another is from local residences who want better living condition. Due to the urbanization process and economic growth in recent years, the demand will increase in the long term.This has been part of the reason why investors bet on the market growth. At the same time, governments and real estate developers have made an endeavor to supply enough apartments to meet the increasing demand. According to Macroeconomic principle , it seems that these have been enough to develop the fact. In an emerging country, political issues are unavoidable in any sense. Land sales have become an essential resource of local governments revenue which means high property price shares the burden of high land-use right. In China, people dont buy land instead they are rental land for a certain amount of time.Normally, it is 70 years. In this sense, you are renting the land or buy the right to use the land for 70 years. Becau se of the conflict of interest, local governments are not earnest in applying the central governments price control policies. In order to facilitate the transaction, local governments even requires very low upfront. Question concerning this will be further mentioned in the next part. It has shown that in Beijing and Hangzhou, land sales have accounted for more than 30% of tax revenue. Thus , local potence has less incentive to tackle the problem.Only average home buyers bear the cost of high property price. Individual investors and state-owned companies made things worse as well. Since state-owned companies normally have much solid financial foundations than cloistered companies, they are more likely to win the land sales bid. It was shown in Beijing that 82 % of land auctions are won by SOEs. These large firms are owned by central government, so in turn, if SOEs didnt win the auction or real estate market suffer a big crisis , both the SOEs and central authority will be touch on . This has encourage local government to cooperate with SOEs.For individuals, they store apartments, waiting for a moment when real estate price goes even higher. Earning quick money is all their purpose. High vacancy rate can explain the situation. Section IV, How Real Estate bubble will affect Chinas economy? Unlike other industries, real estate industry affects not only the industry itself but also social safety, political stability and financial stability in China. There are mainly two types of risk that will threaten the development of Chinas economy, namely, handsome mortgage policy for individuals and corporate.Mortgage loans are relatively new to Chinese residence. Most people pay cash to buy property instead of real estate loans. However, it grows almost 50% per year. The proportion of mortgage loans in nominal GDP has increased by 5 % in just one year. When big fluctuation of property price happens, it is likely that bulk of property owners benefit will be affected from t wo perspectives. First of all, it will mean the shrink of the value of lifetime saving. As property is the largest investment of most families, the decline of price is also the shrink of their wealth.Secondly, households will become more conservative in investing in the future. People will spend less money on consumption and dedicate more money into banks instead. On the other hand, individual and corporate mortgage loans will also pose a threat to the banking system. For individuals, mortgage loans are relatively new. Chinese used to pay cash for their properties. Nowadays, mortgage loans have enjoyed a 50% increase in just one year. When property price declines, the majority of loan owners will have difficulty in paying the mortgage. When it comes in a large scale, clandestine banks can go bankrupt.Due to some negotiation between different groups, real estate developers dont need to pay the full amount of bidding price, instead they only need to pay a diminutive portion to get the right to use the land. To be specific, if a firm wins a bid which price 5 billion RMB, only one-tenth of the full amount need to be paid initially. Whats more, firm can get a loan from banks by using the land as a collateral at the amount of 2. 5 billion. It is clear that firms dont take as much risk as we thought and they can use the extra money to invest in biding for more land.Whenever there is market fluctuation or crisis, these firms and banks will definitely have a difficult time. Conclusion Opinion diverts in interpreting overheating in construction industry. Some believe that China has a real estate bubble and it will burst soon. Others disagree, thinking this is an exaggeration of the problem of overheating investment in real estate industry in some areas. Personally, with the evidence mentioned above, real estate bubble does exist in China. However, the real demand is there as well.Most of the problems come from over investment in some areas. Resource misallocation lea ds to the unreasonable increase in property value. More market liberalization and less state-owned companies deal in the industry will help solve the problem. The importance of property even relates to marriage. There is an name in New York Times, titled In China, Money can buy Love. Owning a property has become the condition for marrying to somebody. If property price jumps dramatically, not only the economy will be affected, but also social well-being.