If your family was pulled out of poverty, and into a comfortable middle class life within the last 30 years, you would have in common with 400-500 million other people who would happen to share the same fortune. Today’s second-largest economy in the world experienced unprecedented growth that began a quarter of a century ago as a result of economic reforms aimed at expanding capital investment, creating private enterprises, and minimizing interference on foreign trade and prices. Therefore, there is no denying China’s economic strength in the international system and her influence over other countries’ economies. However, despite the country’s rise in well-off citizens and its increasing self-sufficiency, growth has slumped during the last several years, a fact many economists and investors around the world find concerning. One major source of anxiety for China’s government is the real estate and property market, a market that accounts for 15-30 percent of the country’s growth. The real estate market, one of the few areas citizens can invest in, experienced high demand during the historic growth, resulting in massive development projects across the country, such as the creation of large cities despite no demand to live in them and, ultimately, the worst housing bubble in history.
With fully developed ghost cities and no market in which people want to buy real estate in them due to exorbitant costs, Chinese leadership must determine how to drive housing prices down without cutting back on real estate investment. If the bubble bursts, millions of Chinese citizens, many of which own upwards to five properties, will lose their life savings. Furthermore, a collapse in China’s housing market translates into a deep global recession. Can the Chinese government prevent a property burst and rein in on skyrocketing housing prices or is the bubble bound to pop in the near future?
There is an optimistic and pessimistic perspective to everything, even for the mother of all housing bubbles in recorded history. Although the tension exists, there is no global consensus of an impending burst in the real estate sector. However, those who believe that collapse is imminent point to one significant reason: skyrocketing housing prices. Housing prices continue to rise dramatically, jumping up to an astounding 53 percent within the past year. If prices increase too much, demand will suffer, considering no one will be able to afford to buy a house. Herein lies the dilemma regarding China’s ghost cities: the apartments and condos are owned by investors who believe a “greater fool” will eventually come and buy the property, despite the fact most of the population can not afford the inflated prices. When demand declines too much while supply increases, prices begin to fall, and the bubble will burst.
In spite of escalating property costs, there is hope that the Chinese government can control and subdue the situation. Since the government controls every aspect of the economy, officials command matters such as property finances, interest rates, and real estate purchasing constraints – virtually nothing is left to the markets to determine. Thus, when the housing market begins to overheat, or in other words, prices swell, the Chinese government will use their influence on the sector to raise interest rates on loans and establish restrictions on purchases. To put it simply, China’s government will do anything in its power to avoid a housing market collapse, considering real estate accounts for more than 70 percent of household wealth, as of January 2016, and an over-inflated housing sector brings tremendous profit to the economy. Another source of confidence that the Chinese government can sustain this bubble is its massive plan to relocate 100 million farmers from rural villages into cities, primarily into the unsold homes in ghost cities, by the year 2020. China additionally hopes this migration will expand domestic consumerism, meanwhile, decreasing the country’s reliance on investment and exports during the slowing economy. To make this ambitious plan a reality, the government intends to increase spending and infrastructure, which in turn, should mitigate the effects of China’s waning economic growth.
Much as a collapse in the housing market can spell disastrous times for China, this burst can be catastrophic for the global economy. Not only do Chinese citizens invest in domestic housing, they invest in housing around the world, such New York City, Sydney, and Vancouver as well, risking the development of major countries’ development. With this much influence on the global economy, a collapse can have serious implications on the world’s inflation, trade, and growth.
Can China avoid possibly the worst housing bubble in history? Only time will tell.