A top Chinese financial institution says that the growing housing bubble is putting economic stability in jeopardy, reports the South China Morning Post.
“A property bubble is the biggest risk for China’s economy,” Zhou Jingtong, a senior Bank of China economist, revealed Thursday in a quarterly economic output report. That China’s housing bubble is regarded as the “biggest risk” is notable given that China is also suffering from severe debt and credit problems. China’s debt stands at 255 percent of its gross domestic product (GDP).
Marked increases in home prices “exacerbate the wealth gap and economic woes,” he explained.
In many Chinese cities, residential real estate prices are skyrocketing. Sixty-four out of 70 Chinese cities have experienced year-on-year increases in housing prices, according to a recent National Bureau of Statistics report. In Shanghai and Shenzhen, prices are up 30 to 40 percent over last year.
China’s housing bubble “is the biggest bubble in history,” Chinese billionaire Wang Jianlin, who made his fortune in the real estate market, recently told CNNMoney.
Property prices are soaring in major cities, but dropping in smaller ones, where many residential structures remain empty, Wang, China’s richest man, explained.
The shifts Wang described appear to be, to a certain extent, byproducts of China’s ongoing urbanization. Millions of Chinese people are migrating from rural areas to rising urban centers. As a result, real estate supply in these areas can’t keep up with booming demand, causing home prices in big cities to increase rapidly.
Chinese citizens are also looking to real estate as other economic sectors struggle to achieve growth. “Due to the slowdown in the real economy, many business owners in real economy sectors have dived into real estate, while others have followed them due to lack of better investment options,” Beijing Institute of Technology Professor Hu Xingdou told the Global Times.
“Property speculation is becoming common practice and everyone is dreaming about windfall profits overnight … these are very dangerous,” Bank of China’s Zhou explained to SCMP.
People are buying for many different reasons. Some expect prices to rise later and create an opportunity to profit. Others are concerned that if they don’t act, they will be unable to afford a house later on, Zhang Dawei, an analyst with Centaline Property, explained to the China Daily.
China tried to crackdown on the expansion of the housing bubble, but income and capital increases, frantic buying, and a limited supply of suitable properties are rendering new regulations ineffective.
Additionally, Chinese homebuyers often try to play the system and skirt the rules. Reports indicate that many couples are getting fake divorces to get around new home-buying regulations.
A viral video released by China Central Television (CCTV) offers insight into Chinese home-buying pressures. The video shows overzealous Chinese people stampeding to purchase homes in Hangzhou, where housing prices are up 20 percent over last year.
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Rising property prices are also drawing the majority of bank credit into the Chinese housing market, causing property prices to increase beyond what average Chinese residents consider to be affordable. At the end of June, direct loans to the real estate sector amounted to $3.6 trillion, Capital Economics told CNNMoney. Chinese banks made $69.6 billion in new loans in July, and 99 percent of those loans were home loans.
China is also pouring its household wealth into the housing market. By the end of 2015, roughly 70 percent of all Chinese household wealth was in property assets.
The “housing bubble” is a very sensitive subject in China. The damage caused by the bursting of the property bubble in the U.S. in 2008 is still fresh in the minds of Chinese people and policymakers.
While many believe that Beijing could prevent a market collapse, it is worth noting that China’s stock market crashed after a sharp rise last year. Few thought Beijing would allow the market to drop, but the crash cost millions of investors their savings, according to CNNMoney.
Many Chinese citizens, losing confidence in the stability of the market, are calling on the Chinese government to address the housing bubble.
“Home prices are going crazy, and governments should have stepped in earlier,” Alan Jin, a property analyst at Mizuho Securities, reports SCMP. The runaway housing market is “a problem that can only be solved by Beijing,” he added.
Whether or not China can solve its housing situation remains to be seen. “I don’t see a good solution to this problem,” Wang told reporters.
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