Will Chinese real estate bubble collapse further?

International Business Times, on August 27, 2014, reports that homeowners gathered to protest against developers cutting prices sharply with a 25 percent drop in home values. A June survey found that 55 of 70 major Chinese cities reported a month-long slump. (http://www.ibtimes.com/falling-housing-prices-are-causing-violent-protests-china-1671270) Protests are general in recent years, with more than 180,000 ”mass incidents” in 2011. Below is a picture showing that angry protesters smashed showroom and they protested holding banner with words “Greenland (a famous developer), return our hard-earned money!”     (http://blogs.wsj.com/chinarealtime/2011/10/25/shanghai-homeowners-smash-showroom-in-protest-over-falling-prices/ )

The problem now, is not whether the Chinese real estate bubble will collapse or not. It is whether the house prices will keep falling and how will this impact China’s economy. In my opinion, the real estate market won’t be active in the future due to oversupply and lack of demand but the prices will not fall too much.

China’s real estate bubble formed after 2008 world financial crisis. During that time, the government carried out a 4 trillion Yuan stimulus package. 38% of total went into infrastructure, which provides funds for infrastructure projects and housing developments. (http://en.wikipedia.org/wiki/Chinese_economic_stimulus_program) House prices have been driven up by keen investors putting cash in. People invest following a  “purchasing when prices are up” pattern. We can see below that house prices are able to rebound very quickly after government carries out restrictive policies.

Rae_China-Housing_d32

Real estate bubble is bursting because of oversupply. Below is the picture of China’s GDP  versus floor space under construction changes. We can see that the GDP growth rate decreases in a mild way but floor space far outpaces the speed of GDP growth, and goes unrealistic high in 2010 and 2011.

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Things go to extreme with irrational developers that “ghost town” appears. The situation becomes “They build. But no one comes”. Below is New South China Mall in Guangdong Province opened in 2005. It’s the world’s biggest mall, more than twice the size of Mall of America, but it’s deserted now. (http://edition.cnn.com/2013/03/03/business/china-worlds-largest-mall/ )

130228031951-dongguan-mall-6-horizontal-gallery

A short video here also demonstrates that developers foresee the falling of house price. The billionare woman doesn’t see future in residential, and is only willing to develop office and retail in downtown area in Beijing and Shanghai. (https://www.youtube.com/watch?v=FM6VN6bMtes)

Not only supply is way too much, there will be demand constraints also.

China has an aging structure. The elder generation mostly have owned a house now after the 1998 privatization of home ownership, noting that the home ownership of China reaches 90% and ranks 6th in the world. (http://en.wikipedia.org/wiki/List_of_countries_by_home_ownership_rate ). The younger generation, some called “Nibbling off of Elders Group”, already have apartment parents buy for them and the decreasing young population don’t generate same demand now as before. (http://www.chinahush.com/2009/12/05/young-people-should-not-be-able-to-afford-houses/)

china-population-pyramid-2014

Besides, China’s new property registration system is now pending final approval of a draft proposal circulated by the State Council. This system will fight against potential corruption because currently some officers invest multiple properties across provinces. (http://thediplomat.com/2014/09/chinas-new-property-registration-system-real-estate-taxes-in-the-pipeline/)

In addition, national property tax is expected to take effect with unrevealed date yet. There is no holding cost for now and implementation of property tax will certainly cut down demand for estate investment . (http://www.globalpropertyguide.com/news-New_China_property_taxes_to_cool_overheated_housing_market-1782)

In my opinion, the house price will go down but won’t go down crazily.

My first argument is that the price will stay relative high, as there’s not an active trading market. In a secondary trading market, people will label their house at high price and won’t sell it at lower price. They would rather keep the house instead of selling.

Also, I think the trend of house price vary from city to city. Tier-one cities will not be affected that much and house price in downtown area is unlikely to fall further as much as suburban area does. One of the reasons is that in China, students can go to school if they belong to the residential area around it. So parents will be willing to purchase around best schools in downtown area.

To conclude, the bubble is caused by loose credit expansion and by shortsighted real estate developers. In the future, the oversupply and lack of demand pose threat to real estate sectors. However, the prices cannot go down further because of consumer’s behavior in the inactive market and still existing demand in premier locations, in addition to the urbanization process in the future. Lessons shall be learned by developers to plan wisely, for example, the senior housing may be an option. Also, lessons could be learned by policy makers. The market is not easily influenced by policies right now. The market has more views and power.

Further Reference:

60 minute interview for Chinese real estate bubble: https://www.youtube.com/watch?v=FM6VN6bMtes

Why China needs a national property tax: http://www.cnbc.com/id/101474091#.

Buying and renting a house in China: http://factsanddetails.com/china/cat11/sub71/item1822.html

With kids still in diapers, Chinese parents snap up college-town homes abroad: http://blogs.wsj.com/chinarealtime/2014/04/11/with-kids-still-in-diapers-chinese-parents-snap-up-college-town-homes-abroad/

Is China’s property market heading toward collapse: http://www.iie.com/publications/pb/pb14-21.pdf

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