Mainland Chinese borrowed almost $100 billion in August alone to buy houses. Roughly 70 percent of new loans are mortgages. Prices in Shenzhen and Shanghai are up more than 30 percent over the year, and most analysts are calling for the burst of the second China real estate bubble since 2014.
However, between the dramatic price increases, the leveraging of the Chinese consumer, the buildup of ghost cities, and Chinese officials’ scrambling to quench their citizens’ desire for prime real estate, there is a positive takeaway.
“Property is at the intersection of some critical reforms, including liberalizing the capital account, granting more rights to urban migrants, and promoting mortgage finance as a new engine of growth. How these complex reforms play out, especially on the demand side of the housing market, will help determine the pace and breadth of China’s economic slowdown,” wrote Diana Choyleva, chief economist at Enodo Economics, in a recent report.
She says it’s perfectly rational for Chinese to use their $9 trillion in savings to buy houses, even if some of them are empty. Even though Chinese try their best to funnel some of the money out of the country to buy property in London, Sydney, and New York, stringent capital controls still prevent most ordinary citizens from doing so.
As of mid-2015, the stock market is not an alternative for investment any longer, and bank savings have a notoriously low-interest rate, often negative in real terms. Also, Chinese just love to buy everything that’s going up, whether it’s stocks or bitcoin.
So is the Chinese housing market a bubble? In spite of mortgages making up 35 percent of all new loans in the first half of the year, the majority of Chinese house buyers still pay cash for their property—much different from the 100 percent debt-financed excesses of the subprime mortgage bubble in the United States. If the buyers decide to borrow, the loan often makes up only 60 percent of the value of the house.
