China’s volatile housing market has generated a great deal of debate over the past few years. Through 2014 and 2015, the real estate sector took a heavy hit. Housing prices fared poorly as sellers seemed to be stuck with an oversupply of property; and new construction projects dried up as well. The sluggish performance of the real estate market placed a heavy burden on overall GDP growth. As such, stimulus in the housing market became a high priority for the Chinese government, an institution that has for years played a particularly heavy interventionist role in this sector. Though the market has forcefully rebounded in 2016, it has not necessarily provided much cause for celebration: speculators warn that a dangerous housing bubble looms overhead.
After two consecutive years of relatively anemic growth, the housing market in China has risen substantially through the first three quarters of 2016. According to an article posted by CNN Money this past week, housing prices have risen an average of 30% in China’s tier-1 cities in 2016; in comparison, housing prices in major American cities have risen only 5%. The volume of sales has increased with similar vigor. In Changzhou, the amount of square footage of property sold increased by a staggering 108% through October of this year; the average square-footage-increase for China’s seven largest cities during that time was 50%. However, the revival has not occurred uniformly throughout the country, for growth remains concentrated in China’s upper-tier cities. Nonetheless, the precipitous rise of both the volume of sales and housing prices has major implications for China’s domestic (as well as the global) economy.
At the epicenter of China’s domestic economy, the housing market is intricately enmeshed with a myriad of different sectors. In a variety of ways, housing fluctuations have a significant effect on both consumption and investment. The construction of new homes and apartments, as well as home-renovation projects, requires a great deal of residential investment. Housing is also a key driver of domestic consumption, for a significant portion of household wealth is, in some way, tied to real estate. According to a 2016 financial update from the Bank of Nova Scotia, over half of all households’ assets in China are linked with property. Thus, a robust housing market induces consumer spending via the “wealth effect”, which has become increasingly important as China has recently moved towards a more consumption-based economy.
Evidently, the housing market is a significant determinant of China’s overall economic vitality. It directly accounts for 25% of the country’s GDP, and indirectly for even more. And the buck does not stop at the country’s borders. Many sectors of the global economy are tangentially related to China’s real estate market. Thus, the 2016 resuscitation of housing prices and sales has propped up not only China’s domestic economy, but also international commodity futures, raw materials trade, foreign direct investment, etc.
What initiated this meteoric rise in real estate, and how sustainable (and stable) is the market going forward? Political reforms from Beijing provided the major catalyst for revival. The very centrality of the housing market made it a prime candidate for stimulus, as it carried the potential to abet overall GDP growth (which, in 2015, had decelerated to its lowest growth rate in 25 years). Thus, the government moved to prop up this floundering market by slashing interest rates, reducing the minimum requirement for down-payments on mortgages, and rolling back regulatory purchasing restrictions, amongst other measures.
Clearly, these measures achieved their intended results of economic stimulus; yet, a closer look at this market reveals its long-term instability. For one, the fundamental problem of inventory overhang has persisted despite the increased demand. Years of overbuilding (of houses, apartments, office buildings, etc.) has resulted in a substantial supply glut. Though subsequent government action managed to successfully boost demand for houses, it scarcely scratched the surface of the underlying problem of inventory stockpiles: China still has an inventory of two years’ worth of homes. What does two years of overhang look like in the world’s most heavily populated country? To put it in perspective, the Wall Street Journal wrote earlier this year that China has “enough un-sold homes to fill seven Manhattan islands.” Countrywide, urban vacancies are ten times the global norm. Evidently, changes in monetary policy and regulations were not enough to solve some of the market’s underlying problems.
Yet the real estate market suffers from even more acute instabilities. Economists and analysts alike are warning that the rapid growth represents not a healthy and sustainable revival, but an overheated and precarious housing bubble. The government’s extension of bank credit may have caused an influx of housing demand, but it also contributed to an influx of debt. Indeed, real estate debt currently sits at 45% of China’s GDP, which might explain why many economists have criticized the government’s credit-extension policies for contributing to debt-fueled growth. Just this past September, real estate mogul (and China’s richest man) Wang Jianlin offered up his diagnosis for China’s housing market in an interview with CNN, describing the current market as “the biggest bubble in history.” More recently, China’s own chief economist echoed some of these concerns, claiming that the country must clamp down on lending in order to dampen this over-inflated market. Yet, Jianlin seems pessimistic that the government can evade the impending implosion, claiming: “the government has come up with all sorts of measures — [such as] limiting purchase or credit – but none have worked.”
Regardless, the road ahead will certainly be difficult. Government measures find the country walking a delicate tight-rope, attempting to strike a balance between propping up the housing market in order to generate short-term stimulus, while simultaneously needing to minimize structural problems such as debt and excessive inventories. Though certain economists remain more confident than Jianlin about the government’s ability to weather this storm, there is no doubt that their failure to do so would be catastrophic. As we learned in 2008, the collapse of a bubble of this magnitude does not happen in a vacuum.