The Missing Plot in the Housing Bubble Story

Published on Author christycui

There’s a famous saying floating around Beijing: A mystery about the housing market is that whenever you think the home price is already high enough, it can ALWAYS be higher. Just take a look at this article published in 2011 predicting the housing market to cool down. In fact, the home price has been more than doubled since then.

A classical story about the housing market in China looks like this – “The problem is that the Chinese tend to put their money in real estate because they perceive it as a safe and reliable investment. This drives up prices, which leads more Chinese to invest, which drives up prices more. But because people are treating housing as an investment, the market is artificially inflated. People buy apartments but don’t live in them. One day, it’s possible that Chinese consumers will wake up and decide that those investment apartments aren’t such safe investments after all, or maybe they’ll just need to free up the cash they used to buy them, at which point they’ll want to start selling. That will lead prices to drop, perhaps catastrophically. ” – The Washington Post

The argument would have made a lot of sense if it were not in the context of China. In my opinion, it is very unlikely that the Chinese will one day start selling their houses and cause a housing catastrophe, due to social and cultural needs.

The missing plot is that, culturally the Chinese believe in settling in a house they own, to the extent that if a guy does not own an apartment or his parents have not prepared one for him, he might have a hard time finding a girl to get married with. So nearly every family would save for their whole lifetime in order to buy an apartment in a city for their child to get married one day. This is why the housing market is so heated especially in urban areas where there’s huge demand and small supply.

Furthermore, I argue that the government’s curbs on the price have been ineffective, and sometimes even counter-effective. Recently Beijing announced its plan to enforce a 20 percent tax on property gain, a news that drives up the price even more with potential buyers acting as fast as possible, because they are afraid that they will have to pay 20 percent more in buying the same property. Obviously, in a high-demand-low-supply situation, the new tax regulation would only hurt the buyers instead of sellers because the sellers would raise the price to reap the same gain.

3 Responses to The Missing Plot in the Housing Bubble Story

  1. As home buyers wait and observe the policy effects of the 20 percent tax on property gain, the transaction volume will likely reduce. However, housing policies like this may only slow down transactions for awhile. Demand and prices will likely remain the same because of low interest rates and limited/very risky investment alternatives available for the Chinese.

  2. The effect of an increase on the gains to selling a property, as stated is likely to incentivize sellers to just charge a higher price, thus causing issues for the buyers. Housing is much more culturally intertwined in China, so demand is likely to remain at similar levels, but I believe price will inevitably rise as a result.

  3. I’ve heard all this before – at the peak of the Tokyo housing bubble. That story did not end well. It’s a safe investment, it gets favorable tax treatment, housing prices can only rise, never fall, other alternatives are worse, you can avoid / evade certain taxes if you do real estate the right way, it’s cultural to have your own home … and policies aimed at the issue were not coordinated across different parts of the government and so didn’t work, or even backfired (hello! trying to restrict supply doesn’t drive down prices!).

    The real “tell” is whether it’s a lot cheaper to rent than to own. Another is whether there’s lots of vacant housing, bought for speculation rather than occupancy.

    But would a “correction” cause US-style problems? My understanding is that at least into 2007 few purchases were financed by loans (though “grey market” money lent to small businesses may find its way to real estate). If so then it will hurt wealth on paper but not trigger the loan default / financial institution implosion we had in 2008-2009 that continues in the US today (lots of households with “negative equity”).