Wednesday, March 14, 2012

Why Hasn't China's Housing Bubble Burst Yet?

By Tianlun Jian

After my series of articles on China's housing markets, some readers have asked why housing in China is so expensive? The bubble is known to everyone, and the government is taking measures to control it. Why has the bubble not burst?  Actually many researchers have forecast that China's housing markets would collapse years ago. Beijing's housing prices were already as high as those in Manhattan even in 2007.

Indeed, there are many things that could have triggered the collapse of China's housing market: the financial system, high housing prices, local government debt, social unrest due to huge income gaps, forced demolition, etc.—just to name a few.

However, most observers and researchers judge China's housing markets only by high housing prices, measured by price/rent ratio, price/income ratio, China's income relative to U.S. income, etc. I think those are necessary conditions to judge if there is a bubble, but not sufficient conditions. Why China's housing bubble has not burst is a big topic and will take a lot of time to write. I will continue writing about it.

Here are a few things that may help us understand why China's housing prices are unreasonably high, and yet the bubble has not burst:

1) China is a huge country AND it is still a poor country (According to IMF data, its GDP per capita was $5,184 in 2011 well below the world average of $9,998, ranked 91 out of 184 countries,) that is still growing very fast;

2) China's income gaps between rural and urban, among different regions, and among individual groups are huge. This helps explain why in many cases housing prices are higher than in Manhattan, yet the majority of the people cannot afford housing;

3) The government is the monopoly land supplier. Restriction of land supply pushes up land prices, the major input for housing prices.

4) There is still a rigid demand for housing from marriages, and the migration of rural people to the cities.

Cross posted from the blog "Eye on China."