Housing Bubble

Is the Chinese Housing Bubble About to Burst?

It started quietly at the end of 2017 when WANDA—one of the largest real estate players in China—declared it was changing its business model to exit the market. Last month, VANKE (another industry behemoth) announced it was doing the same. Coincidence? Perhaps so to optimistic homeowners and speculators who continue to buy into the hype. However, the hasty exit of inside players is always a telltale sign that something is broiling underneath the surface. This week, Xiamen made national headlines when its outer/inner-island properties dropped by as much as 6,000 and 10,000 RMB/m², respectively. How did it happen? Did the Chinese housing bubble really go bust?

Life Cycle of a Housing Bubble

One thing you quickly learn about living in China is the significance of owning an apartment. In a country with more men than women (approx. 40 million), getting hitched often involves a competitive ritual that comes down to who owns more property. An apartment is a bargaining chip, a status symbol, and a necessity. It’s not uncommon for parents to pool entire life savings to buy their son a condo so he can get married.

With such demand, it’s easy to see how the bubble gained momentum. Following the ’07 stock market crash, speculators quickly jump ship to housing and gobble up properties, believing the value will rise. And it did, repeatedly and seemingly without a ceiling. Properties became so inflated—especially in major cities—that white-collar families had no way to pay for it.

Real demand for housing stagnated while investors and developers continued to revel in the process. There was a surplus of concrete and steel and no shortage of investment money. “Ghost cities”  appeared outside of main cities, bought and paid for but no one lived in it.

Housing Bubble

“The combined capacity of China’s 10 biggest ghost cities can house 3.4 billion people, 2.4 times the country’s actual population, which accounts for 18% of the world population.”

The government intervened decisively and cracked down on regulation with the mantra “houses are for living not investing”.

The shift happened when an entire generation realized they couldn’t afford property for its intended purpose—living accommodation.

Five major restrictions soon came into effect to prevent the sale and resale of housing as a commodity.

  1. Buyer Restriction: buyer eligibility and number of apartments are restricted
  2. Loan Restriction: loan prerequisite and amount are restricted
  3. Price Restriction: apartment value is restricted with a minimum and maximum threshold
  4. Sale Restriction: apartment resale is restricted
  5. Type Restriction: commercial buildings are restricted from residential usage

The verdict? After reaching a tantamount ceiling, China’s housing bubble is carefully being deflated with strict regulations. Property values will find equilibrium and the bubble will dissipate (without too much disruption) over a buffer period.