Is There a Bubble Forming in the Chinese Housing Market?

Is China in for a housing collapse reminiscent of what happened to the U.S. in 2008?

The Chinese housing market has boomed in the past year, and investors are concerned that a bubble is forming. Even though the Chinese government continues to restrict multiple home purchases and prospective buyers, property sales  continue to skyrocket. Home values in China are up over 20% in June and, on the year, over 30%. The growth in the real estate sector has buoyed Chinese economic growth, but many fear that it may not last long. Investors deem that the Chinese market is spiraling out of control, and Chinese government policies are not reeling in the overheated marketplace.

China’s housing market is not quite similar to that in the U.S. Home buyers are asked to put a higher percentage of the property value in a down payment, usually at least 30%. In the 2008 U.S. housing crisis, many mortgages had not required down payments, and were even approved without income or job verification. As housing prices stagnated in 2007, and the teaser-fixed-rate mortgages kicked into high-rate gear, those without jobs or income could not afford mortgage payments. The result was a catastrophic economic meltdown that caused the S&P 500 to lose over 50% of its value, pension funds to lose $2 trillion, and the unemployment rate to rise to 10% with 2.6 million jobs lost.

However, the Chinese market holds in place many tight restrictions on purchases, and prevents real estate investors from purchasing too many properties. In addition, sky-rocketing home prices have deterred high-risk borrowers looking to ride the high YOY gains because of the high down payment requirements. In addition, an investment in real estate is not liquid – unlike mutual funds, stocks, or money market accounts.

Investors have gravitated towards investing in real estate because of the volatility of the Chinese stock market.  This past weekend, President Xi Jinping announced that a top priority for China’s economy in the coming years is reducing debt levels and leverage. The result was a plunge in small-cap stocks and losses in the Shanghai and Shenzhen Composite Indices. The Chinese stock market faces troubling selloffs from time to time, such as the flash crash earlier last year. Trading was halted at the time because investors were looking to dump shares. To sheer away from the volatility that the Chinese stock market brings, and to sleep well at night, investors look to alternative investments such as real-estate to bring returns.

The Chinese government continues to enact restrictions on purchases, but home prices continue to rise. Some believe that the Communist Party won’t allow housing prices to collapse. China’s housing market is like a bull on steroids, and continues to ignore the all-controlling matador that is the Chinese government. The real-estate investors that can swallow higher down payments can take part in property value gains, but those with liquidity concerns and market mechanics believe that the music will stop soon. Nevertheless, China’s economy continues to ride on the growing construction, manufacturing, and housing sectors, and went on to beat analysts’ expectations for 2nd quarter GDP growth.

Aaron Choi is a student at New York University's Stern School of Business.

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