Is China's Housing Market Caught in a Speculative Bubble

Group No. 3:

Sherry Lin

Thomas Chen

Joy Chatterjee

Cynthia Montes

China’s housing market is climbing high

How about CHINA?

Ireland, Spain, and US suffered from great recession after housing bubble

burst!

Data resources: economist website

Causes for the climbing property price

• Low mortgage interest rates :– In 2003, China’s former prime minister Wen Jiabao allowed cheap credit

for the construction and purchase of property.– After the global economic recession, the Chinese government slashed

interest rates to boost the market. Households and businesses found it easier to purchase property with widely available credit.

• Relaxed standards for mortgage loans• Limited investment opportunities

– People have few attractive investment opportunities outside China. At home, returns on savings accounts are rather meager and thus real estate and stocks are the major attractive investment avenues.

Contd…

• Traditional belief to hold property as a source of financial asset

• Irrational exuberance– Irrational exuberance, which means a heightened state of

speculative fervor, played a key role in the housing bubble. As with all bubbles, when all parties involved in creating the housing bubble became convinced that home prices would continue to rise.

China’s price to income ratio

Data resources: NUMBEO

2009 2010 2011 2012 2013 2014 2014 MID0

5

10

15

20

25

30

35

price to income ratio

CHINASINGAPORETAIWANGERMANYFRANCEUNITED STATES

China’s price to rent ratio

Data resources: NUMBEO

2009 2010 2011 2012 2013 2014 2014 MID0

10

20

30

40

50

60

70

80

price to rent ratio(city centre)

CHINASINGAPORETAIWANGERMANYFRANCEUNITED STATES

What is a bubble?

• When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble "bursts ~Financial Time lexicon

Is China's Housing Market a Bubble?

• There are signals indicating that China’s housing market may be a bubble:– Oversupply– Contraction of labor – Productivity Slowdown

Resource: “China’s property sector overinvestment” NOMURA Global Markets Research 14 March 2014 , Zhiwei Zhang , Changchun Hua ,Wendy Chen

Oversupply

• The increase in China’s residential property supply has been staggering. The average growth is 13.6% per year during 2000 to 2012, compared with average urban population growth of 3.7%.

• If the current trend holds, it will reach 51 square meters by 2017. Official data show inventory has risen by 182% from 2009 to 2013, yet land sales suggest that supply is set to rise quickly in coming years.

13.6%

Oversupply (Conti.)• Has the rapid increase led to an oversupply of

housing in China?

When comparing China with other economies, there does seem to be an oversupply problem.

Contraction of Labor

• China’s labor force started to contract in 2012 after expanding for at least 16 years and should contract further.

• With depleting surplus rural labor and a rapidly ageing population, the pace of urbanization has slowed; urban population growth is at its lowest since 1996 and is set to drop further in coming years

Productivity Slowdown

• Sharp corrections in property markets are often preceded by, or synchronized with, a decline in productivity growth. This was true in Japan in the 1980s,as well as in Ireland, the UK and the US before 2008. There is a long list of academic research that has documented a decline in productivity before financial.

• In China, productivity was also in a “growth miracle” phase prior to 2008, but has since been in a slowdown phase

Productivity Slowdown (Conti.)

Concluding Remarks

• The consequence of the bubble burst can be disasterful, threatening, and could even cause a depression.

• Though there are many evidence show that China’s housing market may be overheated or caught in a bubble, the identification of a bubble is never an easy job.

• Another important issue is: Can China’ house market soft land rather than hard land.