Chinese property bubble (2005–11)

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An empty corridor in the mostly vacant New South China Mall.

The 2005 Chinese property bubble was a real estate bubble in residential and commercial real estate in China. The New York Times reported that the bubble started to deflate in 2011,[1] while observing increased complaints that members of the middle-class were unable to afford homes in large cities.[2] The deflation of the property bubble is seen as one of the primary causes for China's declining economic growth in 2013.[2]

The phenomenon had seen average housing prices in the country triple from 2005 to 2009,[3] possibly driven by both government policies and Chinese cultural attitudes. High price-to-income and price-to-rent ratios for property and the high number of unoccupied residential and commercial units have been cited as evidence of a bubble. Later, average housing prices in the country increased between 2010 and 2013,[4]

Critics of the bubble theory point to China's relatively conservative mortgage lending standards and trends of increasing urbanization and rising incomes as proof that property prices are justified.[5]


Economic contributors[edit]

There have been many factors that may have led to rising housing prices. Possible contributors include low interest rates and increased bank lending,[6] beginning in 2003 under Wen Jiabao which allowed cheap credit for the construction and purchase of property while making competing debt investments less appealing. During the bubble, local government relied on land sales for income (accounting for up to 50% of revenue), incentivizing the continued sale and development of land.[7] Limited access to foreign investments for Chinese citizens increased the appeal of domestic investments such as property.[8] Chinese citizens also faced cultural pressures encouraging home ownership, particularly for men seeking a wife.[9][10][11][12]

Responding to the 2007–2012 global financial crisis, the spending from the China economic stimulus program may have found its way into real estate, contributing to the bubble.[13][14]

Non-economic contributors[edit]

Hukou(户口)- For citizens of the PRC, Hukou residency status based on cities indicates what kind of medical and education service he or she can obtain from the local Chinese government. Hukou residency is not determined by where people actually live, but by their parents' Hukou status. Fairly good education, employment opportunities and medical services are available only in big cities in China, such as Beijing, Shanghai, Shenzhen and some second tier cities, because China is a developing country. Hukous' premiums in big cities in China should be evaluated properly when justifying the Chinese property bubble. For instance, the education and medical premium of a Beijing Hukou can be evaluated at RMB 600,000 ($100,000), which is popular cited on the Chinese internet. Most government and state-owned enterprises only provide interview opportunities to people with the local Hukou.

Grey income: According to independent economist Andy Xie, the scale of China's grey income is very large- possibly one-tenth of GDP. Most grey incomes are invested in the real estate market of tier 1 and tier 2 cities, which contributes to the fact that the leverage rate of Chinese properties are small compared to the property bubbles in other countries. The normalization of grey incomes in China fed the property bubble in the long run.

Rising fears of a bubble[edit]

Between 2005 and 2011, average housing prices rose rapidly in the Chinese real estate market. Analysts argued over whether this rise was a result of a speculative real estate bubble, or genuine increases in demand. Evidence for a bubble included significant numbers of vacant or under-performing commercial and residential properties[15][16][17] and the continued construction of property despite these facts,[18][19] including an estimated 64 million vacant apartments.[20] There were high price-to-income ratios for real estate, such as in Beijing where the ratio is 27 to 1 years, five times the international average,[21](27 to 1 is based on a double income household so 54 to 1 for a single income household of roughly 6,500 USD/yr) and high price-to-rent ratios for real estate, such as in Beijing where the ratio is 500:1 months compared to the global ratio of 300:1 months[22] There was a weak secondary market for Chinese homes, with the ratio of secondary to primary residential property transactions at 0.26 for the first half of 2009 (four times as many new home purchases as secondary sales). Comparably, Hong Kong had a ratio of 7.25, and the U.S. had a ratio of 13.45.[23]

Contributing to the bubble were Chinese companies in the chemical, steel, textile and shoe industries opening real estate divisions, expecting higher returns than in their core businesses[24] During this period, residential housing investment as a share of China's GDP has tripled from 2% in 2000 to 6% in 2011, similar to the peak of the U.S. housing bubble.[25]

Analysts, including Cao Jianhai, professor at the Chinese Academy of Social Sciences,[26] Andy Xie, a Shanghai economist,[27] and Zhang Xin, a CEO of Beijing real estate developer SOHO China[13] warned of the threat of a bubble and the economic stagnation that would follow. In response to fears of a bubble, in the summer of 2011, Standard & Poor's downgraded its outlook for China real estate development sector to negative from stable, following a tightening of credit conditions in the country and slower sales.[28]

However, trends of increasing urbanization and rising incomes[29] in China that could continue to support real estate prices. The World Bank stated in a November 2009 report that Chinese home prices had not outpaced increases in incomes on a nationwide level, which dispelled worries of a looming bubble.[29] However, in its 17 March 2010 quarterly report, the group said China needed to raise interest rates to contain the risk of a property bubble.[30] In China, there were comparatively conservative mortgage lending practices, particularly in contrast to those at the height of the United States housing bubble[31]

The Economist Intelligence Unit’s Access China service released a follow up report to the October 2010 report "CHAMPS: China’s fastest-growing cities" entitled "Building Rome in a day: The sustainability of China’s housing boom".[32] forecasting the population and average income in close to 300 Chinese cities, and the subsequent demand for housing in China which during the next decade. The report stated that "with China’s property market being an important global economic indicator, China’s housing boom will present opportunities for investors in sectors such as furniture, cars and building materials." Regarding China’s urban population, the report forecasts that between 2011 and 2020 it will "increase by 26.1% or over 160 million people, while urban per head disposable incomes will increase by 2.6-fold to 51,310 RMB (about US$7,500 at current exchange rates)."[33]

Deflation of the bubble and effects on growth[edit]

Between 2010 and 2011, policies were enacted to curb the bubble from worsening or prevent it from occurring. The Chinese cabinet announced in 2010 it would monitor capital flows to "stop overseas speculative funds from jeopardizing China's property market" and also begin requiring families purchasing a second home to make at least a 40% down-payment.[34]

In early 2011, Beijing banned the sale of homes to those who have not lived in Beijing for five years. Beijing also limited the number of homes a native Beijing family could own to two, and allowed only one home for non-native Beijing families.[35] By July 2011, the Chinese Government raised interest rates for the third time that year[36] A new nationwide real estate sales tax was introduced in China in late 2009 as a measure to curb speculative investing.[37] A mortgage discount for first-time property buyers – which had offered fixed, 5% 20-year mortgages at just above 4% – was also eliminated.[27]

The deflation of the bubble began in the summer of 2011, when home prices began to slow or fall in Chinese cities.[38] The end of the property bubble is seen as one of the primary causes for China's declining economic growth in 2012.[2]

As told in an Al Jazeera documentary called Chinese Dreamland by David Borenstein, China's technocrats planned to avoid the late-2000s financial crisis and economic recession by creating the greatest housing boom in human history, with then-Premier Wen Jiabao proclaiming that "confidence is more important than gold or capital" to maintain employment and GDP growth. China ending up using more concrete in two years than the United States did during the entire 20th century. The property bubble peaked in 2009. By 2012, as large established population centers were saturated, developers were building new communities in rural areas in order to keep up the momentum. Since the best way to market countryside housing was "internationalisation" by depicting them as global commerce metropolises, real estate developers enlisted "rent-a-foreigner" companies to stage "dazzling spectacles where their foreign employees are presented as famous entertainers, important businessmen, top-20 models, diplomats, architects". Borenstein observed that these "erotic fantasies" [fueled a] speculative frenzy" which went hand-in-hand with overbuilding in order to maintain the facade of confidence, discouraging negative financial reports which showed that demand was well overstated or even not justified. By 2014 developers were facing a growing backlash, from rural farmers whose land was expropriated without proper compensation, and from buyers upset by the poor quality and/or that other units in the same development being sold at steep discounts.[39][40][41] This bubble ended up creating ghost cities that were abandoned incomplete or finished but largely unoccupied. Most of these empty developments are found in minor cities where state-run industries and mines had closed down, and new housing projects were seen by local officials as a means of diversification as well as cashing in on the property bubble.[42]

The property bubble has resulted in poor quality design and construction, ending up in buildings often unfinished and/or unoccupied. Developers and contractors often cut corners to pocket money, while there is often a shortage of skilled labor, and projects often have short time constraints. Austin Williams wrote that this trend was consistent with capitalism where “Its early stages usually involve building shit, making a profit, and moving on to the next deal – even if the building falls down soon after.” In addition, long-lasting buildings are less profitable that those buildings shoddily built and rebuilt during the same time span; indeed repeated demolition and construction counts toward GDP economic growth.[42][43]

City statistics[edit]

  • Shanghai
    • Real estate prices increased by over 150% between 2003 and 2010[44]
  • Beijing and Shanghai
    • Sales of residential buildings rose by 32.6% in the first 10 months of 2013, according to NBSC. In Shanghai, sales volume of new homes sharply increased by around 26% year-over-year to Q3 2013, according to Colliers International. But residential sales in Beijing were up by only 3.2% in the first 10 months, according to the Beijing Municipal Bureau of Statistics,[45][46]
  • Tianjin
    • Projected to have more prime office space than can be absorbed in 25 years at the current rate[47]

See also[edit]


  1. ^ Bradsher, Keith (10 June 2012). "Selling Abroad, China Eases Slump at Home". New York Times. Retrieved 11 June 2012. the popping of China’s real estate bubble over the past year depressed demand for steel, cement and other materials
  2. ^ a b c Bradsher, Keith (9 June 2012). "Affirming Slowdown, China Reports Second Month of Scant Economic Growth". New York Times. Retrieved 11 June 2012. China’s leaders deliberately popped a real estate bubble last summer because of concerns that middle-class families had been priced out of homeownership in many cities
  3. ^ Chovanec, Patrick (8 June 2009). "China's Real Estate Riddle". Far East Economic Review. Retrieved 13 March 2010.
  4. ^ Pauline Chiou (7 November 2013). "China Property Bubble". CNN. Retrieved 10 September 2015.
  5. ^ Hwang, Yukon (11 February 2014). "Do not fear a Chinese property bubble". Retrieved 13 March 2014.
  6. ^ "China's real estate bubble, a heated debate". Xinhua. 14 January 2010. Retrieved 13 January 2010.
  7. ^ Cohen, Roger (25 January 2010). "A Woman Burns". The New York Times. Retrieved 25 January 2010.
  8. ^ "Real Estate Bubble in China? Part 1". BON TV. Retrieved 1 February 2010. Chinese investors don't have a lot of options that they're allowed. They can't invest overseas unless they already have money overseas. There is -- a lot of markets in China aren't well developed -- like there's no bond market in China. So, they can put their money in a bank and not earn very much. They can put their money in government bonds and not earn very much. They can put their money in the stock market, but they've seen over the past two years, if not before, that the stock market goes down as well as up....So, viewing these limited investment opportunities, people look at real estate and they say, 'You can't lose'. (9:50 - 11:00)
  9. ^ Yu Tianyu (4 January 2010). "Price pressure on the home front" (PDF). China Daily. Retrieved 14 May 2015. If you're not able to settle down in Beijing, that's considered a big failure. In order not to fail, you have to buy an apartment in the city.
  10. ^ Zha Minjie (9 December 2009). "Pitching a tent and a message". Shanghai Daily. Retrieved 13 January 2010.
  11. ^ "Why Shanghai Real Estate Is The Most Obvious Bubble Ever". The Business Insider. 13 January 2010. Retrieved 25 January 2010.
  12. ^ "Blaming house bubble on mothers-in-law". Shanghai Daily. 10 March 2010. Retrieved 13 March 2010.
  13. ^ a b "Interview with a Chinese Real Estate Insider". China International Business. Retrieved 1 February 2010. We don’t really have a view on when it will end; [but] we do have a view that this is a bubble. Real estate is very much driven by government policy. This year we have RMB 4 trillion through the stimulus package, another RMB 6 trillion from municipality bonds, another RMB 10 trillion from bank loans: We have RMB 20 trillion in the system and it all finds its way to real estate.
  14. ^ "Real Estate Bubble in China? Part 2". BON TV. Retrieved 1 February 2010. The government announced a big stimulus package that was about 486 billion U.S. dollars, but that actually was not the big stimulus. The big stimulus was they told the banks, 'Go out and lend', and the banks lent 1.4 trillion U.S. dollars this year and actually increased the money supply by more than a third in the process of doing that. A lot of this money, the evidence seems to indicate, made its way, whether intentionally or unintentionally, into the construction and property sector. (4:38 - 5:20)
  15. ^ Javers, Eamon (10 November 2009). "Is China headed toward collapse?". Retrieved 2 January 2010. And the bears also keep a close eye on anecdotal reports from the ground level in China, like a recent posting on a blog called The Peking Duck about shopping at Beijing’s 'stunningly dysfunctional, catastrophic mall, called The Place.'
  16. ^ Al-Jazeera (9 November 2009). "China's Empty City" (video). YouTube.
  17. ^ Powell, Bill (22 March 2010). "China's Property: Bubble, Bubble, Toil and Trouble". Time. Retrieved 13 March 2010. In Beijing, vast swaths of commercial space sit vacant – including floors of retail space right next to the iconic Water Cube, the swimming venue for the 2008 Olympics.
  18. ^ Cowen, Tyler (28 November 2009). "Dangers of an Overheated China". The New York Times. Retrieved 2 January 2010. In Shanghai, the central business district appears to have high vacancy rates, yet building continues.
  19. ^ Epstein, Gady (09-12-10). "The China Bubble". Retrieved 2010-01-02. As is typical in the later stages of property booms, many investors in China appear to have discarded rental yields as a measure of how much a building is worth in favor of greater-fool pricing. In downtown Beijing office towers sold this year for $400 per square foot, despite the fact that many were unleased and many more are under construction. Check date values in: |date= (help)
  20. ^ "Crisis in China: 64 million empty apartments". AsiaNews. 15 September 2010. Retrieved 9 August 2011.
  21. ^ Xu Shenglan (8 September 2009). "An affordable home for every family, Chongqing official promises". Global Times. Archived from the original on 20 July 2011. Retrieved 13 January 2010.
  22. ^ "Why Shanghai Real Estate Is The Most Obvious Bubble Ever". The Business Insider. 13 January 2010. Retrieved 25 January 2010.
  23. ^ Chovanec, Patrick (18 December 2009). "China Goes Wrong Way on Property Taxes". Retrieved 13 March 2010.
  24. ^ Roberts, Dexter (5 January 2010). "China's property bubble may lead to US-style real-estate slump". Archived from the original on 8 January 2010. Retrieved 7 January 2010. Companies in the chemical, steel, textile and shoe industries have started up property divisions, too: The chance of a quick return is much higher than in their primary business.
  25. ^ Thompson, Derek (16 March 2011). "Chart of the Day: Is This the Chinese Housing Bubble?". The Atlantic. Retrieved 9 August 2011.
  26. ^ "Property prices in China set to halve". The Irish Times. 14 April 2009. Retrieved 17 March 2010.
  27. ^ a b Powell, Bill (22 March 2010). "China's Property: Bubble, Bubble, Toil and Trouble". Time. Retrieved 13 March 2010.
  28. ^ "S&P Downgrades China Developers".”. Retrieved 18 June 2011. Italic or bold markup not allowed in: |publisher= (help)
  29. ^ a b Oliver, Chris (4 November 2009). "World Bank sees no property bubble in China". MarketWatch. Retrieved 17 March 2010.
  30. ^ Leung, Sophie (17 March 2010). "China Must Pare Stimulus to Counter Bubbles, World Bank Says". Bloomberg. Retrieved 17 March 2010.
  31. ^ Powell, Bill (22 March 2010). "China's Property: Bubble, Bubble, Toil and Trouble". Time. Retrieved 13 March 2010.
  32. ^ "The Sustainability of China's Housing Boom".
  33. ^ "China property market 'not a bubble', says EIU in new report".
  34. ^ Mufson, Steven (11 January 2010). "In China, fear of a real estate bubble". The Washington Post. Retrieved 25 January 2010.
  35. ^ "Beijing issues new rules to limit house purchase". China Daily. Archived from the original on 19 February 2011. Retrieved 30 March 2011.
  36. ^ "Attempts to stop the Chinese bubble".”. Retrieved 22 July 2011. Italic or bold markup not allowed in: |publisher= (help)
  37. ^ Jamil Anderlini, Beijing (10 December 2009). "China revives property tax to avert bubble". Chinese Economy. Retrieved 7 January 2010.
  38. ^ "The China Real Estate Boom May Be Finished: Now What?". Business Insider. 9 June 2011. Retrieved 9 August 2011.
  39. ^ "Watch Chinese Dreamland". Retrieved 29 July 2017.
  40. ^ "Chinese Dreamland". Retrieved 29 July 2017.
  41. ^ "China's bizarre rent-a-foreigner industry". Retrieved 29 July 2017.
  42. ^ a b Shepard, Wade. "What China Is Doing About Its 450 Million Square Meters Of Unsold Housing". Retrieved 29 July 2017.
  43. ^ ""Half the houses will be demolished within 20 years": On the disposable cities of China". Retrieved 29 July 2017.
  44. ^ Barboza, David (4 March 2010). "Market Defies Fear of Real Estate Bubble in China". New York Times. Retrieved 13 March 2010.
  45. ^ "China property boom continues relentlessly". Global property guide. 12 December 2013. Retrieved 10 September 2015.
  46. ^ Medium (4 January 2015). "Shanghai Real Estate Trends 2015". Medium Inc. Retrieved 6 January 2015.
  47. ^ Epstein, Gady (10 December 2009). "The China Bubble". Retrieved 2 January 2010. Tianjin, a gritty metropolis not far from Beijing, will soon have more prime office space than will be filled in a quarter-century at the current absorption rate.

External links[edit]