The Waning of China's Real Estate Industry

Some viewpoints of this video may be a little bit radical and pessimistic,  but most of the problem it described are correct.Overall,it could offer a better understanding for China real estate bubble problem.

Factors causing the Chinese real estate bubble and solutions

To analyze the reasons why the real estate bubble problem emerged and getting more serious, we should focus on these factors as follows. The basis of the bubble could be the scarcity of land. As China has a population of 1.4 billion, so the areas of undeveloped land resources are very limited. However, from the perspective of an individual, they would always want to seek better living conditions with the ownership of homes as this is traditionally and culturally ingrained within the Chinese mindsets. What’s more, enterprises want to use the newly undeveloped lands to expand their size, building and production. These reasons increase the demand for land. As a result, people are always very optimistic on the expectation of the rising price of real estate. In addition, the land is owned by the China central government, the developers and investors could buy the land-use rights from the government, which is tightly controlled. This makes the supply of land resources very limited, which causes many real estate enterprises and private investors to invest largely in real estate, so as to obtain the benefits from rising prices. Moreover, as investors are optimistic about the future economic prospect they use the real estates to get more mortgage loans from the bank to reinvest the speculation makes the price soar.

The speculative demand expansion is the direct cause of real estate bubble, for the purpose of speculations people buying houses are not for the purpose of occupying it but to resell it for a profit. This kind of behavior once again becomes popular, it is difficult to control and thus the real estate bubble emerged. Furthermore, the excessive lending of financial institutions make the real estate bubble deteriorates. Financial support is a necessary condition for real estate bubble as it cannot exist without the cooperation of banks and other financial institutions. Buildings are fixed assets, which can easily be auctioned by the bank if the real estate investors cannot payback the mortgage loan. Banks consider that the loan risk very small, so they are willing to extend the mortgage loans to real estate investors. In addition, the banks are also too optimistic on estimating the value of the mortgaged property, which strengthens the financing abilities for the borrower to invest in real estate, intensifying the rising price in real estate and the expansion of the industry.

The burst of bubble could lead to a disastrous result in both economics and the political environment, it is very important for the Chinese government to regulate the real bubble estate before it goes too far. The investment in the real estate market is very active so the government should formulate appropriate policies to monitor the market. The scale of investments should adapt to the income level of citizens in every city and the newly built buildings should be controlled. What’s more, the regulation of real estate’s secondary market should be strengthened, preventing excessive speculation. In addition, the government should adjust the structure of real estate investments encourage the investment on economically affordable housings. Besides, building a thorough warning system for nationwide real estate market is also necessary, by analyzing the collected data from the market, the government could evaluate the investment, make predictions in future trends and make reasonable polices. These warning systems will provide the government an effective way to monitor the market, preventing the emergence of the bubble.

The control of land resources is another important aspect for the government to shrink the bubble. The government should supply land size depending on the market requirement. Aimless investments must be stopped, punish all kinds of irregularities and illegal land trading activities, and prevent government corruption in dealing with the problems of real estate investors. In addition, the regulation of financial institution should also be taken seriously. Much of the money that promotes the real estate bubble is from the bank, so it is crucial to improve financial regulatory system and strengthen supervision ability. Restrain the total social credit, make it adapt to the real social economic requirement, reduce the loan to the real estate investment by adjusting the interest rate and industry policies. Moreover, the foreign capital should also be regulated, especially the foreign hot money, preventing it from speculations and deteriorating the bubble.

Detail analysis of China's realestate problem

From the diagrams concluded last week, we are able to get an overview of the current situation of China’s real estate bubble and a cause of concern for China’s society and economy.

The high selling price that far exceeds the income of an ordinary family that could not afford a house, especially for those who just graduated and need to build a new family, so they have to apply for loans, as a result they have to use most of their salary to pay back the loan. This group of people is called “mortgage slave” or “house slave” in China, and the number of them are increasing. What’s worse, the selling price is still rising or remains at a high level in most cities in China. In order to buy houses, the saving in the bank decreases sharply as the money in the bank are moved from the accounts to pay back the loan. However, the mortgage loan in China increases very fast within the past 10 years, on one hand, ordinary families have to get the money to pay back. On the other hand, investors loan the money to build more houses. This is a potential danger for the bank.

However, some people may ask, as the newly constructed houses increase every year, why are the prices still so high? This leads to another problem, some rich individuals or institutions, both from China and overseas, they buy a lot of houses from the land agents and keep it vacanct, not for the purpose of living, but for investing, more precisely, for speculation. They cause the scarcity of houses in the market, so people who are in real need of houses have to buy from them at a higher price. Moreover, as the land agents and speculators generate large amount of income, they have to pay a high amount of income tax to the local government, become big contributors to the government's income, to some extent, causing the regulation of the government to become ineffective and inefficient.

If the situation gets worse, one day the bubble will burst, with disastrous chain reaction. Generally speaking, the economic problems includes the abnormal economic structure, the bank crisis, the financial crisis, the production crisis and consumption crisis. As factories are closing down, the unemployment rate increases, this leads to the surge of crime rate, the instability of the government and the general unrest of the society. In conclusion, the deteriorating economy always results in serious political and social crisis.

The current situation of real estate bubble in China

Here are some indicators concerning the judgment of how serious the bubble is in real estate,and compare with the actual situation of China.

Specific indicators	Bubble reference standard		China actual situation
	Light	Serious
Selling price	Price income ratio less than 6	More than 10	Approximate 8
Housing price growth rate	The value of housing price growth rate divide per capita income growth rate is more than 1	Housing price growth rate is more than 30%	The value of housing price growth rate divide per capita income growth rate is more than 1
The scope of price markup	Rising in every categories	Rising in every categories	Rising in every categories
Letting price	Real estate rent and leasing price index is less than CPI but more than 100	Real estate rent and leasing price index is less than 100	Real estate rent and leasing price index is less than CPI but more than 100
Investor motivation	Optimistic	Fully optimistic	Optimistic

Specific indicators	Bubble reference standard		China actual situation
	Light	Serious
Sales revenue growth rate	Sales revenue growth rate divide total retail sales growth rate is more than 1 but less than 2	Sales revenue growth rate divide total retail sales growth rate is more than 2	Approximately 2
Mortgage loan growth rate	Mortgage loan growth rate divide per capita income growth rate is more than 1 but less than 2	Mortgage loan growth rate divide per capita income growth rate is more than 2	Approximately 2
Deposit	Decline	Serious decline	Decline
Foreign hot money	Inflow in a large amount	Pour in rapidly	Inflow in a large amount
Private capital	Inflow in a large amount	Pour in rapidly	Inflow in a large amount

Specific indicators	Bubble reference standard		China actual situation
	Light	Serious
Purchasing house for investment	Percentage of purchasing for investment in total purchase is more than 10% but less than 20%	Percentage of purchasing for investment in total purchase is more than 20%	Percentage of purchasing for investment in total purchase is more than 10% but less than 20%
New property investment growth	New property investment growth divide GDP growth rate is more than 2 but less than 3	New property investment growth divide GDP growth rate is more than 3	New property investment growth divide GDP growth rate is more than 3
Real estate investment loan growth	Real estate investment loan growth divide total loan growth rate is more than 1 but less than 2	Real estate investment loan growth divide total loan growth rate is more than 2	Real estate investment loan growth divide total loan growth rate is more than 1 but less than 2
Housing construction growth	Housing construction growth divide sales area growth is more 1 but less than 2	Housing construction growth divide sales area growth is more 2	Housing construction growth divide sales area growth is more 1 but less than 2
Housing vacancy rate	10-20%	More than 20%	More than 20%

From the 3 diagrams above,we were able to briefly conclude that China's real estate economy is in a dangerous trend which needs to be regulated urgently.Further research will be post in next blog.

The Chinese property bubble problem

The Chinese property bubble problem is becoming the most serious “disease” of China’s economy. The figures indicate that from 2004 to 2009, the real estate prices doubled in 35 major cities in China, for example, the price in Shanghai increased by 150% during that period. The bubble exist both in residential and commercial real estate.

Real estate bubble is a kind of economic bubble that causes the long-term rapid increase in real estate prices which result in the market transaction price that far surpasses their actual value. In the past 20 years, there has been three cases of the influential real estate bubble worldwide, namely the Japanese in 1991,the Thailand and other southeast Asian countries estate bubble in 1997 and the estate bubble in 2007 due the U.S. subprime mortgage crisis, with ripple effects to those countries and the world economy.

The emerging, developing and bursting of the real estate bubble have its regularity. The price continuing to increase in a time period, which drives people to expect the price to go higher. Thus, to avoid higher bidding price, a number of new bidders come in, they want to buy the property earlier, however, making the real estates more expensive, and the prices rocket up. When the bubble overexpands to an unbearable level, it will burst, as a result, the economy and the market turns from booming to recession, with serious economic problems. The property bubble problem is a vital subject for Chinese government which can not be neglected and must be taken seriously.