Introduction
After the 2009 to 2011 global recession, it was difficult to settle for another great economic bubble. The least expected continent to experience the same was Asia even after China took precedence in hiking the prices of its assets making it almost impossible to own a home in the country. According to economists, the real estate bubble in China is uncalled for considering that the country invests in various building technologies, which instead should oppose inflation in housing prices.
Economists describe the economic bubble as a continuous rise in the price of commodities without any speculations of reduction of the same. From the perspective of an economist, the real estate bubble in China affects the domestic, regional, and international platforms. This happen because the country has the second most powerful economy after the United States. China has a significant presence in almost all parts of the world, thus making it impossible to ignore the economic bubble in its real estate business.
Initially, most countries sought the construction services of the Chinese because of their quality and affordability. This might not be the case because even fellow Chinese can barely afford mortgage services. There are many factors contributing to the economic bubble, especially from the perspective of the banking industry and the engineering departments in the housing ministry.
This paper intends to explain the primary causes of the real estate bubble while presenting the side effects. In addition, it will address the measures taken by China to reduce the prevalence of the problem.
The Current Situation
Since 2003, there have been significant increases in the prices of houses in China. The Chinese find it almost impossible to acquire mortgage services owing to the augmenting interest rates in various banks. In 2005, the situation became an economic crisis and the Chinese started complaining about the cost of acquisition and ownership of residential and business properties. In 2011, there was a decrease in the price of real estate, but the situation never lasted.
In 2012, China recovered from the great depression, but the prices of some commodities and assets remained unchanged. Currently, the Chinese blame the government for the austerity in housing ownership because the prices of the same assets are almost four times the price in 2011. Many factors determine the ability to own a house in China; the factors include income levels and the ability to afford the houses.
The Chinese blame the government and the cultural traditions for instilling the mindset during the real estate bubble in the country. According to the Chinese, home acquisition should be a responsibility for the male. This gives limited room for women to acquire the free residential houses even though they have the ability to achieve the same.
According to economists, the conservative culture of China deters it from lending assets to potential home and business owners. By adopting an open policy to business, the country would be capable of attracting investors from other countries, and this would enable it deal with the crisis. However, primary factors including insufficient building space deter the country from continued construction. This could be the greatest cause of the real estate bubble.
China has the largest population in the world even though it has the biggest land mass. Most of the land has water, which promotes its tourism and fishing activities even though the same discourages construction.
With a growing population, the country will experience a worse situation in the future concerning the economic bubble. As such, population control is important before blaming the crisis on other factors. The country will definitely have to deal with urbanization austerity in mortgage lending services since the two factors do not correlate.
Causes
Limited Space for Development
With its 9,596,960 square kilometers of geographic size, China hosts about 1,360,763,000 people. This makes it the country with the highest population in the largest physical space. Between 2013 and 2014, the country added a population of over half a million. The number of Chinese residents in the country is definitely striving to fit into the available space. This makes the Chinese to seek other investment and settlement avenues in other regions across the globe.
The population of the Chinese in third world countries almost equals the population in China. In China, immigrants living in Beijing cannot acquire mortgage services because the available space can hardly fit the existing population. China’s physical space cannot allow the development of detached houses. Most of the land covered by water only support marine and recreational activities. Only apartments can accommodate the growing population.
This explains the sudden increase in the prices of commodities and assets in the country. The demand for housing is high in comparison to supply, thus making it impossible for families to own houses even when they have the fiscal capability to acquire the same. Considering the limited space, the government controls construction and development by increasing the price of land acquisition.
Urbanization
The need to keep up with urbanization is one of the causes of the real estate bubble in China. Already, there is limited space for development even though the country cannot ignore the importance of urbanization. China has to develop private and public property to match the needs of the urbanized world. This calls for the dismantlement of previously constructed buildings in order to match the technological advancements. This improvement attracts an increase in costs, which the Chinese find difficult to afford.
Urbanization is inevitable for China considering its potential to develop affordable and high-tech machineries for the rest of the world. China’s global outreach exposes it to the media, thus making people constantly watch its activities.
It has an obligation to urbanize all its cities and not entirely concentrate on the known Shanghai. While the population continues to grow, the government finds it difficult to provide urbanized housing facilities to all families. This interferes with the ability of banks to offer mortgage services at the same rate, which they did in the past two to three years.
Urbanization is a prerequisite for China even though it contributes immensely towards the real estate bubble in the country. In most cases, the government leaves urbanization to personal investors and, initially, they had an opportunity to achieve the same through low-income rates after acquiring loans from various banks. With urbanization, China has to assume many responsibilities including management of its GDP considering that housing directly affects the aspect.
Through urbanization, Chinese textile and chemical industries attract many consumers to the real estate industry. The industries provide raw materials to the real estate business, thus enabling private developers to acquire affordable resources for building; private investors set up houses with different prices. In 2012, the prices rose by over 2%; this contributed towards the economic crisis in the real estate business.
Fast Economic Growth
China experiences one of the fastest economic growths in the world; the highly industrialized nation has the second largest economy in the world. Fast growing economies often attract high rates of property upgrading. When upgrading occurred in China, the prices of the properties increased given that their value appreciated. The fast economic growth signified by high-income levels made private investors flood the construction and housing industry. Domestic and foreign investors had an opportunity to own commercial and private property.
The household income of the country rose beyond the US, and this empowered people to acquire properties. Considering a high response to this, the government had to formulate strategies of reducing the same. The government together with other monetary authorities intervened by increasing the interest rates in banks, thus making it difficult for private developers to acquire loans.
This left the government with the sole responsibility of constructing and owning properties in the country. With stringent government controls, it was difficult for the Chinese to acquire properties; government controls are often strict, and violation of the same normally causes legal interventions. As such, the Chinese and foreign investors have to live with the real estate bubble because they also earn a lot of money when conducting business in the country.
Low Interest Rates
Low-interest rates between 2009 and 2011 attracted people to acquire loans from Chinese banks. The banking industry is a delicate sector since it controls financial resources of a country. Excess and uncontrolled borrowing within the period contributed towards the real estate bubble because there was a rush to acquire loans at the low-interest rates.
The loaning behavior of the Chinese economy exposed the country to investors who refused to return the cash within the stipulated period; it was difficult to trace debtors because most of them intended to return the money after their investments bore fruits. Following this, the government and the banking industry increased austerity in the lending business disabling people from acquiring loans at the same rate as before.
This reduced the rate of construction and increased the prices of the available residential and commercial buildings in Beijing, Hong Kong, Shanghai, and other cities. Most business owners vacate building following inability to pay for the overly expensive houses. In 2012, the banking industry increased interest rates to disable private investors from acquiring loans. In the end, the government benefits while the Chinese suffer because they are unable to afford the houses that lie vacant for several months.
Conservative Cultural Practices
China has a conservative culture that makes adaptation difficult for people from different countries. The closed-up system might be different from other societies, but it enables the country to exercise communism. The conservative culture contributed immensely towards the real estate bubble in 2012. The country rarely invites communication from the global arena. In each socio-political activity conducted in China, the Chinese use their cultural ideologies, instead of international principles to chart its development programs.
After the 2011 recession, the country required consultancy advice that would enable it overcome the period without stress. The conservative culture deterred China from accepting professional advice from countries in the West that came out of inflation, but succeeded in reducing the prices of commodities. Closed-up systems of governance naturally prevent access to foreigners and investors that have varied ideas concerning the real estate industry and investment in banking.
Worldwide, people refer to the Chinese as people who encourage traditional techniques of property ownership and acquisition. For instance, property ownership mostly correlates with men seeking to marry or to accommodate their families. Female property owners might be minimal in China, and the real estate managers take advantage of the gender bias to hike the prices of homes for the Chinese. This makes the primary factors the greatest contributors to the real estate bubble currently affecting China.
Effects
Domestic
The Chinese Refraining from Property Ownership
One of the effects of the real estate bubble is the fact that most of the Chinese refrain from owning homes of private properties because of the high ownership and interest rates. Currently, people would not occupy several vacant houses because they cannot afford the apartments. This happened because the citizens realized that the cost of housing was increasing, but the developers never took notice of the changes in behaviors of the consumers.
According to economists, about 65 million houses and business enterprises might be destroyed before accommodating people for different purposes. The housing prices have tripled since 2008. For example, in 2008, a person could buy an apartment at 180 Yuan; the same apartment was valued at 520 Yuan in 2013. In addition, mortgage sellers constantly contact willing buyers, but the response levels are low. This translates to major losses for property owners who constructed buildings during the real estate bubble.
Financial Collapse
In response to the high rates of property acquisition and credit acquisition by private developers, the Chinese banks decided to increase the interest rates of loans. There are fears that this could lead to a major financial crisis. When a local inflation occurs, there is a possibility that the same would translate into a regional and an international crisis in the end. China might be at the verge of a global fiscal crisis because when people refrain from property ownership, the banks and the government face harsh fiscal times.
Most investors are optimistic that the demand for housing will escalate in future. In addition, they believe that only a section of the real estate market will face the adverse effects of the looming crisis. Another concern is the austerity in credit issuance because this would affect private investors intending to acquire properties in China. When economies collapse, significant aspects of the very entity begin to fail and since real estate is a huge function in Asia that determines the progress of most countries, it flops too.
Finally, increase in interest rates could lower the GDP because few people will contribute through taxation. Already few Chinese residents own properties in the country; this lowers the government’s chances of attracting taxes from the target population. Over the long-term, the country will have to deal with a low GDP resulting from reduction in tax contributions from the real estate business.
Regional
Affecting Relations with Other Countries
Countries should be able to accommodate immigrants since they help in reinforcing mutually beneficial relations between countries. China has a reputation of denying mortgage services to immigrants living in Beijing. This appears as a form of discrimination, as it tends to deny people the equal right to property ownership. This happens because the conservative culture deters other people from contributing towards the overall development of the economy.
Regional relationships are important for China owing to its rivalry with countries in the west. Most economists compare the country to Europe because of its financial position in the world. This recognition requires fair accommodation for other countries in the world. Undoubtedly, without this, China will have to deal with criticism from Asia and other parts of the world. Currently, Dubai, which has the world’s tallest skyscraper, offers a good option for people in need of real estate services.
China will have to deal with marketing strategies that target consumer acquisition should consumers shift their focus to Dubai. However, the strategy is costly in comparison to consumer retention. China might not even have good relationships with countries that host its citizens especially in the third world. In such occurrences, China could lose contracts to other nations that offer expensive services, but have excellent relationships with other nations.
As such, the real estate bubble is a great deterrence to China’s ability to enjoy quality public relations with other nations. This explains its solitude in the East even though its neighbors including Thailand, South Korea, and India enjoy a global presence owing to their accommodative nature.
China’s Capitals Following the US trend
Before the housing market failed in the US, almost all countries looked to Europe and the US. Countries sought to invest in France and America because the real estate business offered affordable and high-end estates for investment. This exposed the US and Europe to a global platform, but the same lasted for few decades. One of the reasons for the 2009 global economic slump was the fact that most Americans refrained from investing in the stock market.
Consequently, they reduced the demand for commodities, as the prices of assets rose. Instead of a steady increase in prices, the US also engaged in a bubble increase of commodities and assets causing the real estate business to fail completely. The real estate business in Europe, UAE, and the US were core in the development of the countries; the failure affected business completely.
Beijing, Shenzhen, Hong Kong, and Shanghai might face the similar fate as Dubai and New York City following a continuous increase in the prices of properties. The fact that people refrain from purchasing properties in China might affect its reputation worldwide. Currently, most Chinese contractors do not get building tenders because the world associates the individuals with the prevalent economic bubble in the country.
China’s Response
According to the Chinese ministry of housing, the country had an economic stimulus program between 2007 and 2012 that caused the economic bubble in the real estate sector. The program supported a Hukou system, which enabled immigrants from different countries to come to China for investment, studies, and other purposes. In the end, the immigrants only took care of their transport while they had the ability to acquire citizenship in the country.
The ministry of finance mentioned that this led to a sudden influx of immigrants into China; this made it difficult to provide accommodation for all immigrants. Population increase added pressure to different cities since the country has the highest population in the world.
The government and banking sectors had to deny immigrants the opportunity to acquire mortgage while it increased the prices of houses to control the Hukou system. There are efforts underway to control population growth before reducing the prices of houses because the two have a direct relationship. Additionally, China uses the real estate bubble as an opportunity to control economic growth.
According to the government, it is aware of the situation and it plans to reduce the number of home and property owners as a strategy of population growth control. Through this, it will be able to save the real estate developers from the losses they would experience by reducing the prices of homes.
By reducing the prices of residential and commercial properties, China might experience the same loss that America, Europe, and the UAE faced after the 2011 global financial crisis (GFC). Instead of causing an economic crisis to the entire country, the government prefers compromising one sector of the economy. By committing the real estate entirely, the Chinese government deters slump from affecting other areas. Even as this happens, the country still has the real estate bubble under control.
Conclusion
In summary, the real estate bubble in China is a consequence of both domestic and industrial factors. The primary contributors include the available land mass to the ratio of people living within the available space. The only long-term solution to the problem is population control.
The Chinese government may mention that it has the issue under control, but this is a huge economic crisis, which it should not underestimate. Instead of condemning its Hukou system, the government should actively engage in population control programs. In essence, most of its fiscal problems are internal, and it should not focus on immigrants as the scapegoats when dealing with fiscal problems.