Chinese residential housing prices are increasing rapidly, which according to Bloomberg China, is related to a lack of confidence in other forms of business investments. The stock market is underdeveloped and stagnant; the bond market is in it’s infancy; and the return on bank deposits is only marginally outpacing inflation. In the wake of this bleak investment environment, the Chinese are turning to the housing market, which is experiencing strong growth: “New home prices in major cities, including Beijing and Shanghai, rose more than 10 percent in July from a year earlier”
There is a belief among China’s wealthy investors that a real estate bubble is developing in china. Although housing prices in china are indeed rising rapidly, for a housing bubble to exist, the prices must be rising to unsustainable levels. Rapid increases in housing prices, by themselves do not necessarily mean that a housing bubble is developing. There is a very real possibility that the housing market is properly adjusting to a shift in demand for housing within china. We know that since 2000, china’s population has increased from 1,262,645,000 to 1,350,695,000 in 2012. That’s an increase of 88,050,000 people, which is more than the population of all but 13 countries in the entire world. China’s increase in population over the last 10 years would be more people than live in 229 of the 242 countries reporting population in a simple Wikipedia search; all of those people need somewhere to stay.
In addition to the rapid population growth, china is experiencing significant economic growth overall and on a per-capita basis, and there are indications that the growth is real and being distributed across the income spectrum. The WorldBank’s measure of population distribution shows a fairly constant share of China’s income going to the to fifth of earners in china over the last 25 years or so. There is some amount of equal distribution of wealth in china and there is much more wealth to go around. The gross national income of china per-capita increased from $3180 in 2003 to $9060 in 2012. This doesn’t account for inflation, but the story of rapid growth, spread among china’s 1.3 billion people is still evident. With the addition of so many heads needing a roof and the increasing wealth of china’s citizens, the country could be experiencing a legitimate shift in demand that is raising prices rapidly, but not necessarily artificially.