Real Estate Bubble in China

Topics: Real estate, Real estate bubble, Subprime mortgage crisis Pages: 6 (2469 words) Published: March 31, 2011
Real Estate Bubble in China: the Present and the Future
2011 Q3
HA _S28

The concern over whether China is experiencing a real estate bubble has increased, especially after Dubai crisis happened. The construction area of both residential and commercial properties has increased by almost 6 times since year of 2000. China has enjoyed a sharp increase in property price since 2006. Especially, after 2009, due to the large stimulus package, majority of the money went to construction and real estate industry. It further pushed up the property price, leading to a lot families became the “slave of the property” who were struggled to pay the mortgage. Not only the high price has affected most people‘s lives in China, it could also greatly affect Chinese economy and even the global economy. Domestically, the prosperity of real estate industry is fuelled by local investment and easy band loan. According to MSN Money, there is an increase of 38.2% from 2010 in property market , mainly from developers and speculators. The scale of loans goes to property market is even more scary, up to $1.3 trillion. People have compared the real estate bubble of China to the United States. The question is will Chinese property bubble has the similar effect? Fortunately, the difference between China and the United States are quite striking. The factors lead to the collapse of property market in United States will unlikely to happen. In China, a country with high saving rate, people used to buy property in cash 4 or 5 years ago. Even in the heyday of residential mortgages, the loan is not as easy as in the U.S. Down payment amount is much higher than in the U.S. A decline of 20 to 30 % in prices will not let the bubble burst in China. In conclusion, the burst of real estate bubble is not easy in China and, if happened, will have limited effect to the world economy. In this paper, I will try to present the whole picture of Chinese real estate market from the current situation to how it evolves, and will touch on the future as well. This will be achieved with the help of some data and the explanations of ratios.

Section II: A Real Estate Bubble in China?
The first question needs to be answered is that is there a real estate bubble in China? Since government tries to avoid this sensitive word “bubble”, and data are not reliable. People have to figure them out and estimate how large the bubble is. Bubble is believed to exist in many major cities of China. For example, in Beijing, real estate prices rose by 350% to 900 % only in 7 years from 2003 to 2010(Figure 1).Other indicators of real estate bubble have reached an alarming status in China in many major cities, including Beijing, Shanghai , Nanjing , Hangzhou and so on. The even striking fact in China is that you can hear stories about “empty cities” very often. China has the second largest mall empty in southeast China, and modern empty city in Ordos. These are only the cases that you know and easy to identify. However, more empty streets or blocks are in the cities, waiting for people to move in.

Ghost City Ordos: the famous empty city in China is Ordos, which is located in the north part of China. Ordos is the second richest city in China, followed by Shanghai, even richer in term s of per capita than Beijing. The city is rich because of abundant natural resources. One –sixth of China‘s coal reserve, one –third of it is natural gap reserves. The GDP has increased at 25% per year, much higher than the national level. With such a huge amount of money, local government wants to attract more people to stay in Ordos. This is how the empty city comes from. The new city was designed to accommodate 300, 000 people, with a capacity of holding 1 million people. Currently, you can hardly see any people on the street, even though most of the properties have been sold out. Surprisingly, the city is still under construction. The local government still believes that they...

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