China's real estate bubble and its global economic implications

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")

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")

Limitations and Key Assumptions

The limitations of the research are that we could be taking is of a more pessimistic view. As this kind of growth rate could be indicative of strong underlying demand, which could sustain the current level of prices. At the same time, we are assuming that the real estate market is centralized. However, in reality there will be pockets that will not follow the trend of what is occurring. When you put these two factors together, it could mean that the conclusions drawn, are taking a worst case scenario into account vs. A real world perspective.

Conclusion

Clearly, the research indicates that some kind of real estate bubble is developing in China. As asset prices have been encompassing a larger percentage of economic growth and many consumers are effectively priced out the markets. Once this occurs, it means that the odds increase dramatically that some kind of bubble will take place. This is important, because it shows how the strategy that we are using will be able to corroborate the underlying hypothesis. However, there are limitations, as we could be taking a more pessimistic view of these events. As a result, we will need to conduct more research and look at variety of sources. This will help to provide specific insights about: the recent events in China's property markets and the long-term implications.