Next Real Estate Bubble? Is China to avoid US & EU’s mistakes?

Next Real Estate Bubble? Is China to avoid US & EU’s mistakes?

Fhoto Pudong skyline by Josephine Lim.

At this point in the crisis and from the western point of view, there is a continued focus on possible new housing bubbles in some other parts of the world, and China is no exception. Is it justified?

Reducing prices and housing stock.

After years of increases, the price of housing in China has dropped. It is estimated that the construction of new buildings will drop 10% this year, and the same the following, which is estimated to involve 2.5% less of GDP. This has already occurred in the U.S. first and then in the EU. and other countries. Can it be that there is a great new real estate bubble in the way of the Chinese “locomotive”, and that this is to have a global effect?

Prices in the residential sector have fallen 50% in the major Chinese cities in May. It is feared that if property investment is disincentive, this might also imply the Chinese economy to lose strength earlier than anticipated, and no one would like so.

Construction and housing have been one of the great pillars of China’s growth in the past two decades, and its health is crucial to the construction industries, steel and cement. The real estate sector is also where Chinese investors seek higher returns than those offered by banks. And of course with the revaluation of land municipalities have funded their infrastructure projects.


Photo of the empty city of Ordos on

Certainly the view of the so called ‘ghost cities‘ is spectacular. These were major projects of the real estate boom. For example Ordos in Mongolia, was sized to accommodate a million more people, but its streets and houses are empty. Only 2% of its buildings were occupied so far.

But beyond empty cities, the phenomenon of falling prices and available housing accumulation is occurring mainly in cities of the second order, such as Dalian and Tianjin, which could accumulate by the end of 2014 a stock of housing equivalent to 20 months of demand.

And if it is true that the price of the new housing lowered in 50% of cities in May, and that the figure is the lowest in the past two years, according to the National Bureau of Statistics (NBS) china, but it also rose in other cities (approx in 20%).

Other emblematic cities in China such as Chengdu and Xian also recorded falls (both 0.3%). And the biggest price drop was in Hangzhou (capital of Zhejiang), with 1.4%. In May there were price cuts in Shanghai (0.3%) and Shenzhen (in the south of the country – 0.2%), while for example Canton remained unchanged.


Photo: The Canton Tower During the 2010 Asian Games opening ceremony in Guangzhou, China.

Construction impacts on China’s economy.

Construction accounts for 13% of China’s GDP. Important but far from decisive, as it was in highly dependent of construction countries such as Spain, for example.

And it is noteworthy that the Asian giant’s economy grew at an annual rate of 7.7% in the last quarter of 2013.It is the eighth consecutive quarter of increases under 8%, 9% 10%… as we were used to. Still 7.7% continues to exceed forecasts that believed that the slowdown would be greater

In recent times, the Chinese authorities have already taken measures to control the rise in housing prices just to avoid creating a housing bubble.

Some of these measures to discourage investment accounted restrictions on buying second and third homes or raised taxes on real estate transactions.

And conversely now to encourage the housing market the People’s Bank of China (PBOC, central) called in April to encourage financial institutions to grant mortgages. And the market seems to be adjusting to selectively to encourage buy in medium cities with more stock. The Chinese authorities appear to have resources and control and scope for applying.

According to Michael Pettis, professor at Peking University, “China will not live, as has been speculated in recent times, not a hard landing or a soft landing, but a long landing” with growth of around 3% and 4% is to be maintained for years.

Further reading:

Is China the next Lehman Brothers? by John Cassidy

Tic, tac, tic, tac… La burbuja inmobiliaria de China no termina de estallar

Los precios de la vivienda nueva caen en la mitad de ciudades chinas en mayo


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