The unprecedented urbanization that China has been experiencing has caused a “spectacular property boom” over the past decade. Migrants moving to cities from the countryside are increasing demand for city housing as do the increasing middle class looking for an upgrade. Residential sales have shot up 35% in the last three quarters of this year versus last, while the prices for new homes has increased by more than 20% in some major cities.
However, many are growing suspicious of the boom, calling the market a bubble. As discussed in class, many areas in China have had local governments overdevelop in anticipation of becoming hubs of economic activity that just has not yet been realized. In places like Yingkuo Coastal Industrial Base, rows of buildings sit empty while property salesmen claim that big companies are building factories nearby. Local governments have also developed such ghost towns outside big cities to the same results. Despite the “waste of resources” these developments are proving to be, according to the government, 144 cities in 12 different provinces are planning 200 new towns. Figures are also suspected of being corrupted, as local governments have been buying the new homes, rather than individuals. In addition, there is concern of the massive amounts of debt that developers are incurring. Lastly, it is vogue for Chinese companies to acquire developments overseas rather than domestically in China despite the local governments’ anticipation of their business.
Interestingly, perhaps in China even if property bubbles burst in smaller cities with local inflated markets, they may not take the national economy down with them.
This is a major thing that I noticed when I was in Shanghai. There were tons of buildings that were just completely empty. Yet I also saw many migrant workers living in what looked like storage cubes on the sides of construction sites. Another article I read talked about how there isn’t enough housing for the elderly in many satellite towns. Hopefully they can combine these two problems to come up with a reasonable solution!
I also noticed this issue when I was in Qingdao, China. One afternoon I left my Aunt’s house in suburban region for a walk and got fabulously lost. To my Aunt’s displeasure, instead of taking a taxi, I decided to follow signs for the city center (市中心）and go to my grandparents house about a (in retrospect 4 hour undertaking.) I walked through some huge, ugly developments that had few, if any, inhabitants. Perhaps, in time, as more Chinese come from the country they will fill, but at the time the area had the feel of a semi-ghost town. Nothing of significance was around them, the bus lines didn’t go through, some of the streets weren’t even paved. It’s hard to imagine that development ever becoming significant. Most of the manufacturing in Qingdao is far from the city center and I didn’t understand even the future significance of those developments.
Markets function through information proliferation. If no one viewed the housing market in China as a bubble it might continue to grow albeit at a slower pace. By papers publishing the very idea that there is a bubble investment in these projects might dry up. Whether, it was the chicken or the egg that will cause this crisis who knows… How the Chinese Government handles a meltdown would be interesting to watch. Will friend of the regime find themselves repaid in full at the expense of others or will those who took risks actually have to realize losses?
I think a bubble, if it exists, will only manifest itself after a rise in global (or Chinese) interest rates. If the debt becomes more expensive, it becomes harder to buy properties as well as to build them. This could destroy the secondary market to some extent. Otherwise, if the country grows fast enough, it can absorb all of the housing based on migration flows and increased urbanization. If low interest rates and the local government run real estate speculation did promote overbuilding/asset misallocation, that will become clear once those phenomenon come to a halt.
The argument is complex and both sides have valid points in whether a bubble is forming. I agree that the cost of debt will obviously impact mortgage origination, but China remains in an interesting balance where its local governments can still arbitrage real estate values. The collective nature of rural property rates has artificially subdued real estate values for years. As property rights become greater and more commercial developers, etc. continue to buy real estate this abnormality should correct. Even if the bubble does form as developers look too far in the future—producing the present ghost towns—a correction will probably not be long-lived. The savings rate is notably high and both income growth and population shifts indicate robust future demand for real estate over the next decade or two. Especially once the savings rate begins to fall and consumption picks up (as interest rates rise), demand for housing will continue its upward trend as a result of basic demand fundamentals.