Over the past decade, the Chinese housing market has exploded. While long-term increases in the price of housing are often tied to increases in income, prices in the Chinese housing market has far surpassed the rate at which income is growing. In cities like Shanghai and Beijing, the average real growth rate in the price of housing is two to three times the rate at which disposable income is growing. This has made housing unaffordable for an increasing proportion of the city’s population, and their exclusion from the housing market suggests there may be a housing bubble. While several demographic and structural factors underpin the continued increase in the price of housing, the housing bubble’s growth depends on people continuing to speculate in the housing market. A change in the expectations of the housing market could lead to a sell-off, causing the bubble to burst. The sheer size of the Chinese housing market means that its collapse could be disastrous.
The rapid increase in the price of housing in many of China’s cities is due in part to a lack of investment channels available to the public. Despite having a high savings rate, the bank deposit rate in China is low, and can’t keep up with inflation. This leaves little to no incentive for the public to deposit their earnings into savings accounts; and as a result, investment in housing as an alternative asset has become more appealing. In the past, China’s stock market has exhibited high volatility, and this, combined with its crash in 2008, has led to diminishing investor confidence. The stock market also lacks important legal protections for investors, and until these are provided by the government, purchasing real estate will be a more appealing investment.
Consumer behaviors specific to China have also contributed to increasing price of homes. Parents often purchase homes for their children, and even grandchildren, and in many regions homeownership is a prerequisite to marriage. These behaviours are due in part to the psychological differences between owning and renting a house being especially large in China. As housing prices continue to increase, these social practices facilitate the savings of multiple generations being drained into the housing bubble.
Over the past decade, housing market speculation has played a large role in the increase in housing prices. This involves purchasing homes based solely on the belief that their prices will continue to rise, instead of turning them into rentals or other forms of productive investment. The increased speculation in the housing market has led to a widening divergence of house rents, and house prices. The result being a self-fulfilling bubble in the housing market, as many people buying into it drives the price up, only further increasing the incentive for others to speculate in the market. However, the survival of the housing bubble depends on sustained increases in real income, of which speculation on the housing market is based upon. If increases in real income were to slow down, expectations of the future of the housing market could shift, potentially “bursting” the bubble.
The implications of the housing bubble bursting are colossal. Due to a lack of financial alternatives, housing is often used as a store of value. A crash in the housing market could destroy public savings in retirement, businesses, or medical costs, and could result in massive layoffs in the construction industry. This would represent a huge loss of disposable income, the impact of which could be felt around the world.
