Real Estate Bubble in China

Real Estate Bubble in China

Over the last several years, China has been seeing above average economic growth. Part of the reason for this, is because the country has been rapidly developing and industrializing. This has caused economic expansion to accelerate at a tremendous pace. A good example of this can be seen by looking no further than the GDP growth rate. As China, averaged 9.31% a year increases since 1989. ("China GDP Growth Rate") for the real estate market, this has meant that many investors are believing; that prices will continue to increase at current rates (which are in excess of 12% a year). (Dalamia) This is problematic, because it means that many investors have been helping to fuel a bubble in asset prices. While, a variety of different homes are continuing to sit vacant, despite the tremendous building boom that has taken place.

Evidence of this can be seen with in a study that was conducted by Morgan Stanley. They found that 25% to 30% of the available inventory of residential homes is vacant. (Dalamia) This not because of a lack of demand from investors, instead it is based upon hording that is taking place. What has been happening is that many investors will often purchase properties and will let them sit empty. The idea is that they can hold the asset over the long-term and will see a significant appreciation in value. At which point, the available supply decreases on the market and prices begin to skyrocket. (Dalamia) This is problematic, because it means that prices are heading to unsustainable levels. Once this takes place, it is only a matter of time until: the bubble bursts and a similar situation occurs in China to that of the United Stated during 2008. The only difference will be that the decline could be more pronounced, as the large amounts of speculation created the equivalent of a mega bubble. This is when asset prices increase so much, that the inevitable adjustment will make any kind of recovery more difficult. In this thesis, we will be examining the history of: this bubble and what are its long-term impacts on the world economy. Once this takes place, it will provide the greatest insights, as to what were the causes of the underlying real estate bubble that is developing in China.

Hypothesis

Due to the events that are taking place in China, we have developed the following hypothesis that we will be examining during the course of this project.

The Chinese real estate market has seen a consistent period of economic growth. However, various attempts to stimulate the economy have meant that a bubble is developing. This will have an adverse impact on asset prices in the next several years. As oversupply and unsustainable prices, will causes a major contraction that will have ripple effects on economic growth.

Importance of the Topic

The importance of this topic is to gain a greater understanding of the potential effect that this bubble could have on the world economy. An example of this can be seen with comments from the Governor of Reserve Bank of Australia (Glen Stevens). He said, "China is tightening their policies with a little more determination maybe now than we saw last year. That means we can expect to see China slow down this year and we have a big stake in managing that process as smoothly as possible. That's going to be a cyclical event overlaid onto the longer run structural adjustment that probably has quite some years to go." (Perrin) This is significant, because it shows how a possible slowdown in China could have an adverse impact on the world economy. Once this occurs, it means that the odds of entering another recession increase and that there is a possibility we could see a depression. The reason why is because, the oversupply in China's real estate markets will only make the situation worse in other regions around the globe (i.e. The United States). ("Over Supply of Home and Land")

Prior Research on the Topic

There are a variety of different sources that are discussing how China has been experiencing a real estate bubble. In the article that is titled China Housing Market Nears U.S. And Japan, (2011) it talks about how their real estate market is approaching similar levels that were seen in the U.S. prior to the collapse of prices. As real estate accounted for 6.1% of all of China's GDP growth last year. This is the same level as the U.S. during 2005 and Japan during the 1980's. Commenting about what was taking place Citigroup analysts observed, "It's evident that property prices are no longer sustainable once the residential investments achieve above 8% of nominal GDP, and China may not be an exception." ("China Housing Market Nears U.S. And Japan") This is significant, because this information supports the hypothesis that a real estate bubble is developing in China. As prices could be in the process of rolling over, this will have an adverse effect on the economy.

The article that was written by Silverstein (2011), talks about the possible negative impact of the real estate bubble bursting. As he believes, that this could plunge the world into another deep recession. Once this occurs, it means that consumer spending will decline and the standard of living in the country will fall. as, China will experience similar challenges that: the U.S. And other countries around the globe were going through in 2008. This will make it difficult for the Communist government to maintain power. The information from this source is useful, because it helps to provide specific insights about the lingering effects of the real estate bubble bursting in China. As this is discussing various scenarios and how this could have an adverse impact on the economy. (Silverstein)

Research Approach

The basic approach that we will take is to use qualitative research. This is when you are looking at a variety of sources, to examine the overall impact that it will have on the subject. In this case, this style will help to identify possible trends and it will allow us to understand other outcomes. Once this occurs, it means that the overall quality of research and analysis will be as objective as possible. ("What is Qualitative Research")