Introduction
Shenzhen, a metropolitan in Southern China, has a house price to income ratio as high as 41.15 according to Property Investment Index 2012. This is not surprising news for Chinese real estate market, as the average housing prices in China had already tripled from 2005 to 2009. Chinese property bubble is an ongoing real estate bubble in both residential and commercial real estate. While this phenomenon has caused many social, economical and cultural problems in the country, there was a heated discussion about the causes of this bubble. This essay will discuss the main causes of this bubble and further connect the problems with China’s basic condition.
Causes of Chinese Property Bubble
The real estate bubble refers to when people’s expectation of housing price keeps rising along with the mounting real estate price, more buyers and investors enter into the market, which further raises the housing price much higher than its instinct value with the continuing rising price and speculative capitals. Bubbles in most cases begin with a quite extreme boom period which has lasted for a relatively long period (Lind, 2009). The causes of the Chinese property bubble could be various and these may include loose bank credit, speculation and high land price.
Loose Bank Credit Policy
Since the real estate industry is one that is capital-intensive, the development of real estate has to have capital that is strong. However, having real estate development being constantly expanded, the own-capital of the property developers cannot sufficiently finance the operations and therefore, taking the bank loans turns out to be the main source of finance for property development. In most cases, the governments have particular constraints in handling the real estate development loans, “but because of the high returns in real estate industry, many commercial banks violate relevant regulations in the actual operations” (Bo, 2011,p.37) These lending banks give out many loans to the property developers; they even do not engage in verifying the credit ratings of the developers and this in turn results in large amounts of money flowing in to the real estate market, bringing about “over-development in real estate market” (Zheng, 2011, p.10).
It is reported that China’s broad money M2 supply in the year 1999 was about 11.99 trillion Yuan and this amount increased to 72.6 trillion Yuan in the year 2010, and this increase was five times more than what was realized in the year 1999 (Zheng, 2011). It is also reported that the credit and monetary growth rate is by far more than the GDP growth rate; “in 2009 the growth rate of M2 was 27.7%, while the year’s GDP growth was only 8.7%; in 2010 the growth rate of M2 was 19.7%, while the year’s GDP growth was 10.3%” (Zheng, 2011, p.10). The ultra-issued currency is among the reasons for the increasing prices.
Having the prices that are increasing rapidly, the competition that exists among the commercial banks in China in the real estate market exacerbated even more (Holt, 2009). In order for each of the commercial banks to effectively compete for the market share, it has to loosen its constraints, allowing large numbers of the bank loans to flow in the real estate market and by doing this, they give encouragement to people to obtain the mortgage loans (Holt, 2009). Basing on a research that was conducted in 2010, it was found out that the real estate development stood at 5.71 trillion Yuan and out of this amount, the bank loans were 1.13 trillion Yuan, “with an increase of 48.5%; and individual mortgage loans were 840.3 billion Yuan, with an increase of 116.2%” (National Bureau of Statistics, 2010, p.1).Just from these statistics, the funds that came from the bank credit represented 34.48% of the overall real development finances.
It is pointed out that the present real estate market situation of China is the same as a situation that was there before the collapse of the real estate bubble that was in Japan among other nations (Bo, 2011). The quick increase of the bank credit causes much of the bank funds to flow into the real estate market, “which has pushed housing prices to rise higher and caused the housing bubble in most cities” (Bo, 2011, p.37).
High Land Price
According to Zheng (2011), by analyzing the costs that are associated with real estate development, it is not hard to discover that the increased high housing prices are basically caused by the increasing cost of land. It is pointed out that “the urban municipal governments in China have the right to acquire land from villagers for urban development with central government approval; rural farmers do not have the right to sell their land, even when they are the owners” (Bo, 2011, p.39). This, in part, is the reason for having land acquisition disputes that have turned out to among the most high-profile social concerns in this country.
Following low compensation payment to farmers for land and high price charges to developers, the local governments in China have been in a position to utilize land as an important financial revenue source (Huang & Qiu, 2008). It has been pointed out that the profits that come from land could account for more than 60 percent of a large number of revenue of the local governments (Bo, 2011). The local governments have as well depended on the housing construction as a quick way of driving development of other industries, mostly the crisis that occurred in the United States in 2008. Consequently, a large number of the local governments are not willing to allow the housing prices to go down (Bo, 2011).
It has also been pointed out that supply of land in China is limited and the land in a city will turn out to be scarce (Yu, 2006). Thus, beginning from the year 2003 and thereafter, the state commenced on regulating the real estate market and gave out a “series strict control on land use” (Bo, 2011, p.39). Basing on the principles of demand and supply, at the present, the situation in China is that there is an increase in demand and at the same time, supply is decreasing. Therefore, the land prices are turning out to be higher and higher and this in turn contributes to having rapid increase in housing prices (Bo, 2011).
Speculation and Investment
The speculative purchases in the housing market are, to a large extent, attributed to the evident “predictability in housing prices, at least in the short run” (Bo, 2011, p.35). The definition of the housing prices speculation is usually given as “the purchase of a house at the current time motivated by the expectation of a real increase in the price of a house in the future” (Bo, 2011, p.35). Speculation and investment in the Chinese housing market could be carried out in a number of ways. One of this ways is through idle capital from the SMEs. China is known to be a manufacturing nation and the manufacturing industry is a force that drives this nation’s export, which has brought in much revenue to the government as well as to the entrepreneurs. It has also contributed towards job creation for a large number of people in China.
However, it is pointed out that that there has been a crisis in this industry in the recent years, beginning from the year 2006 (Bo, 2011). During that period, the SMEs that are manufacturing-based were facing a general decline in the operating as well as investing environment. They were facing a rise in the interest rate, “the increase of tax on business, a price increase of raw materials, the 2008 global financial crisis and the big appreciation of Chinese Yuan to U.S dollars or Euros” (Bo, 2011, p.p.35). Therefore, it is reported that beginning from the year 2006 to the present time, there have been approximately between thirty to forty percent of Chinese small and medium-sized enterprises becoming bankrupt in the south as well as in the east cost of China. After going bankrupt, even if the companies are closed down, the business owners themselves have much personal funds and this is what is referred to as idle capital. Therefore, in order to offer protection of their money against depreciation following inflation, they invest this money (idle money) in other areas and this involves investing in the real estate market because this is a profitable market in China. Basing on a research that was conducted in this regard, it is reported that such investors obtain more than the ten-year profits they can obtain from their manufacturing business (Huang, 2008). Hence, in the current day, an increasing number of entrepreneurs, regardless how their companies are performing, are increasingly investing in the real estate market.
Moreover, following the growth of the Chinese economy, the people in China are increasingly getting rich, the disposable incomes are also increasing and this is enabling them to have idle money that they can invest in the real estate market. The houses are not just utilized by the investors themselves but purchasing them as well serve as a way of protecting their money against depreciation resulting from inflation. In fact, it has been found out that almost all people have not lost their money that is invested in housing for the reason that the housing prices in China have kept on increasing in the course of the recent years. Having this temptation, an increasing number of people are engaged in making money by investing in the real estate market whether they are wealthy or just in a position to give the down payment and thereafter paying the monthly mortgages. To the current day, people can still make money.
Conclusion and Recommendations
Some of the main causes of the Chinese property bubble include; speculation, high land prices, and loose bank credit. However, the Chinese property bubble will not last forever and at some point it would burst, even if this is unpredictable. When such occurs, this will mean having reduced housing prices and a decreased demand. Since many of those who buy houses rely mostly on bank loans, a sharp reduction in the price will lead o a situation where people may choose not to pay the bank loan and allow the banks to forfeiture their houses and this will lead to both the owners and the banks to lose some percentage of the housing price. If the prices go on reducing, this will leave a great negative impact on the whole financial system. In the Chinese present situation, in case the property bubble bursts, the ones who take the risk are the Chinese commercial banks. Some of the appropriate measures need to be taken to ensure the Chinese financial system is not affected in a negative way in the future. For instance, there is need to encourage people to invest their money in real economy rather than engaging in the speculation in the real estate market. Moreover, the credit policies of the commercial banks in China should be tightened. People may also be encouraged to rent houses instead of buying them by using a mortgage loan.
References
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