Government's choice

The government has already raised the rate of reserve 12 times by over 20% in recent two years(Financial Times China). Less lending and investment indeed decreased house prices, housing bubble seems being controlled and everything seems fine. But in fact, it is just a deadlock. Developers and investors are staying back and watching, waiting for a rebound signal.

The deadlock will not last long since it bring a new problem to Chinese government. Local governments have difficulty in paying their debts since less income from the land sales and taxes. There exist a trade off between preventing Chinese economy hard landing or house price adjustment.

Chinese government definitely choose the former although Chinese government announces that it will resolute in adjusting house prices. In recent weeks, rate of reserve ascended twice. Market absorbed the signal and boomed again, some property stocks like FanHai Construction, YinJi Develop, ZhongLiang Property reached the limit up.

It can be predicted that Chinese government will secretly relax the restrictions on house market and let the bubble grow again. The bubble will outburst someday in the future unless the government can do the followings:
Cut loans, especially cut loans for purchasing house; Monitoring the loans; Reduce the reliance on land sales and taxes; reduce the expenditure of local government; increase the costs of holding over one properties; get rid of monopoly and decrease taxes; crack down on corruption

Comparison with Japanese housing bubble in 1980s

In this part, the Chinese real estate will be compared with Japanese real estate.

Differences:

China's economy is still immature compared to that of Japan during the property bubble. See the GDP growth of China keeps at over 8% level each year, while GDP growth of Japan was just 3-4% in the late 1980s. Another clue for China's immature economy is that the the low urbanization rate 46% in 2009 (from National Development and Reform Commission (NDRC) of China). Due to the high economic growth and the potential urbanization, China can easily overcome any property market slowdown.

The house price - income ratio is almost ten in China, which is really high compared with developed economies it is only four or five. However, this rich-world yardstick could be misleading since "Chinese homebuyers do not have average incomes but come largely from the richest 20-30% of the urban population. Using this group’s average income, the ratio falls to rich-world levels.", stated by Tao Wang, an economist at UBS. In terms of price-income ratio in Japan, it was was 18 in 1990.

In addition, Chinese homes carry much less debt than Japanese properties did in 1980s. Chinese households’total debt accounts for 44% of their disposable income in 2009(from BCA Research),  against 130% in Japan in 1990.

Similarities:

Over investment in China and Japan (1980s) due to bank easy lending and quantitative easing. See from the graph above, a sharp lending growth of 15% after the collapse of Lehman Brother. $1.08 trillion was lent in the first half of 2009. This resulted in a 15% increase in retail sales, a 33.5% jump in fixed asset investment and 53% increase in property sales.( research by The People's Bank of China). Easy lending is no doubt one of the factors increase the bubble.

In terms of lending volume Japan in 1980s,

banks began to in upsurge the lending. Nearly doubled increase during 1985 to the mid 1990s. Quantitative easing created a liquidity surplus, huge amounts of funds flew into commercial real estate and non-manufacturers.  Most of lendings (equivalent to 40%–50% of GDP) was thought to have gone into the property market. This was considered as the main trigger for the Japanese real state collapse. 

Why this happened ?!

The factors increase chines housing bubble could be as follows:

1) The distance between the rich and the poor is sigmificant, low salary and imcomplete security insurance

Acorrding to HuRun Wealth Report, China has 0.96 million multimillionaire. Moreover, over 60 thousand of them are billionaires. The rich could buy any houses as they want and did not care what prices of the houses, which led to an increase in the housing prices.

besides, Ordinary people consumed less due to the low salary and imcomplete security. This definately decreased the damand and supply of consume products. The further consequnce is that investors would choose to invest in real state rather than in industry.

2) The fiscal policy of America and China increase the liquidity in market and inflation

The slack monetary policy and proactive fiscal policy of the U.S. after the dot com bubble and increase in money supply after credit risk forced great amount of U.S. dollars flow into Chinese market,leading to over liquidity in Chinese market and high inflation.  Besides, Chinese government stimulated the economy with $0.62 trillion, which drove the housing prices of China grow to a higher level to some extent.

3) Local governments rely too much on land incomes

Land in China is owned by the government, with usage rights granted to individuals and corporations through long-term leases. Local governments garner revenues from land through both taxes and fees. Higher property price brings higher revenue to local governments, and that's why local governments are reluctant to control or decrease the property prices. 

4) Too strong monopoly power



Barriers to private enterprises from monopoly companies, restriction on financial development of civilian, unreasonable taxes for private enterprises made small firms in China hard to survive and drove them reluctant to invest in real economy. The consequence was that funds flew into housing market.

                                                    source: commerce department

5) Corruption of Chinese government officials

Most local government officials against positive housing price adjustment and public housing construction in order to seek exorbitant profit. Corruption cases are rising from 1998 to 2002, "Zhejiang province registered more than 100 cases of corruption, involving 116 people - including 38 and 78 from realty departments and enterprises respectively. Official statistics show that bribery cases account for 54.31 percent of the total." stated by Miao Ye, "Asia Times,Investing in misery"

6) One child policy and Chinese traditional concept

It is shame for a man getting marry without owning a house in China.Most females in China are reluctant to marry males without a house or a car. Although some females accept those men, their parents will not accept such sons-in-law. So owing a house becomes one of the essential conditions of getting marry for a man. From the statistic report of LIANJIA Property Trade center, the average of initial house purchaser is 27 in Bejing, 42 in Japan and Germany, over 30 in America and 36 in Taiwan. These data does not indicate that young people in Beijing are rich, but indicate that most parents buy houses for their children.   "Thanks" to the one child policy in China, most families have one child. This phenomenon enhance the paying ability of parents. Parents can now purchase a house or afford down-payment of it for their only son. One child policy and the traditional marriage concept make the housing prices less elasticity!

7) Bubble market psychology


The book "The great housing bubble-why did house prices fall?" states that property bubbles caused by speculators fear and greed. Another book called "Financial psychology" by Las Tvede mentions that stock price movement is determined by human psychology, such as conformity, fluck mind,etc. The same principle can be applied to house market.

What has happened?!

Chinese housing bubble has kept growing since year 2000. The overconfident developers, state-owned firms and individuals have been leveraging themselves to invest in this "forever growing money tree". According to UBS AG, property price growth rates in Shenzhen, Beijing and Shanghai are 120%, 64% and 40% in 2009, respectively. Huge profits gained from investing housing market enhanced their greedy and ignored the risk of bubble outburst, which creates a vicious cycle. 

See the comparison among houses prices around the world(picture below). The houses from the top to bottom are houses in , Indonesia ($107,000), Russia, Argentina ($149,000) and China($150,000), respectively. It blew my mind when I saw the 60m² house in Beijing's country side worth 150 thousand dollar.  I know this could be hyperbolic but it somehow indicates the serious housing bubble in China, especially in main cities!

In  2010, The price-income ratios in main cities of China were extremely high, especially for Shenzhen.  The disposable income of a family was $10,208 in 2008 while the average house price for a 90 m²  house was $254,833 (Society construction analysis report in 2010). It took a ordinary family 25 years disposable income to afford a house without eating and consuming!

                                                                                                                                                                      
Fortunately, some effective housing policies had come out last April. For example, banks cut loans for investing in housing market; Increasing the down-payment and mortgage interest rate; Non-natives have to pay taxes for at least one year before taking mortgages, etc. These policies were meant to cut the demand and supply for houses at the same time.  

The first week of May 2011, the average price of new houses in Beijing, Shanghai and Shenzhen dropped by 20%. The policies seemed working, said by Stephen Green.