Stopping the Bubble from Popping

Published on Author reilly

This article talks about how some Chinese cities have attempted to decrease the risk of a housing bubble. Raising the second home down payment by 60-70% makes sure that investors in new houses can afford the house outright and if credit did become a problem less of an impact would occur. Even new first time homeowners must put down 30% of the cost upfront. This requires families to have accumulated a lot of cash on hand depending on the apartment/house. Third home investors can not seek mortgage financing altogether.

Along with these measures to restrict purchases, the cities plan to increase the supply of homes by 10%  of the current level to further decrease prices. This pressure to decrease prices came from the central government, due to the highest jump in prices that occurred last month since 2011. Qu Anxin, a Shanghai-based researcher at Centaline claimed that the central government is specifically targeting key cities because an overall crackdown nationwide would hurt the economy. Of the major cities looked at, only Wenzhou out of 70 total cities saw declining property prices.

Unfortunately, these measures appear to be more symbolic. Second home buyers only make up 10% of total housing sales. The government must try not to scare investors into believing there is a housing bubble if there is not one, but must also prepare for the eventuality that a bubble is forming.

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2 Responses to Stopping the Bubble from Popping

  1. I think the final point regarding the second-time home buyers is meaningful. Since these purchasers account for 10% of the total housing sales, their ability to purchase second-homes does have a material impact on aggregate demand for the sector. In combination with Oliver’s post below, the rising interest rates to reduce liquidity in the system as well as the increasingly onerous down-payment requirements will serve as means for slowing the rate of house price appreciation. As of now, the overall population growth coupled with income per capita gains still justify increasing real estate values. Although the “ghost cities” and other developments that have been built prior to realizable demand are rapidly increasing supply, on a long-term basis, if monetary and fiscal policy use reasonable caution to limit oscillations, real estate has much further to rise without experiencing a bubble’s negative downward catalyst.

  2. I like the mechanism these cities are using to abate the risk of the housing bubble. It is good to see someone learning from the mistake of the United States.