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Waiting for China’s Precarious Housing Bubble to Burst

China’s current real estate market today is well-reflected in Dickens’s classic line, “It was the best of times, it was the worst of times.” Years of unprecedented growth, massive urbanization, and a continuous economic boom that has launched China from one of the world’s poorest nations to its second largest economy have also increased the prices of its housing to some of the world’s highest in certain parts of the country. For the typical working resident in cities like Beijing and Shanghai, buying a house with the wages earned from working an average-paying job can be nearly impossible. These exceedingly high prices have prompted a wave of concerns that China is currently experiencing an unsustainable housing bubble, in the mold of the US in 2008, with fears that it might also burst.

“Basically, in China, or at least Shanghai, if you’d bought a house fifteen years ago, you’re set. You’re like a millionaire in US dollars,” Bohan Lou ’20, a junior at Yale who was born and raised in Shanghai, told The Politic. “But on the other hand, if you weren’t able to buy a house by that time, then you’re totally [screwed], and you’ll never be able to afford a house. It’s a classic example of the rich getting richer.”

Despite government intervention and regulation meant to slow down the increasing house prices, China’s real estate is still growing at a breakneck pace. Growth in the first quarters of 2018 was driven mostly by Tier 2 and 3 cities, in accordance to the way that China divides the size of its cities.  Tier 1 cities are mega-large metropolises such as Beijing or Shanghai, while Tier 2 cities such as Qingdao, Dalian, and Tianjinare also well-known, but smaller. The emergence of this new data has the potential to worry policymakers in China, demonstrating that housing prices quickly becoming unaffordable is not just a phenomenon of the ultra-populated megacities, but is a spreading trend that has now started taking its toll on the residents of smaller areas as well.

With all of these facets of the current Chinese market seemingly proving that its market is overheated, well-respected news outlets, such as Bloomberg, the New York Times, and Forbes, have so often compared China’s situation to pre-2008 America that it has become an accepted reality from a Western vantage. Bloomberg cites the fact that from June 2015 through the end of 2017 SouFun Holdings Ltd.’s 100 City Price Index, rose 31 percent to nearly $202 per square foot. Put into perspective, that’s about 38 percent more expensive than the average square foot cost in the United States, where average income is also more than seven times what the average Chinese worker makes.

With statistics like those, it has become common wisdom among many talking points in the international discussion that China is in the midst of a bubble that may be even more dangerous than America’s ten years ago, which will inevitably pop with potentially devastating economic consequences. In fact, if one were to Google “does China have a housing bubble,” the following picture is what would come up:

However, some factors in the discussion of China’s housing bubble are often left out when comparing its situation to that of the United States’ a decade ago. The economies of the two countries are fundamentally different. While China is experiencing urbanization at a massive rate and shifting from a manufacturing- to service-focused economy, the United States already has a developed economy, and generally has a population that is not growing at a large rate.

Urbanization is key to understanding China’s current housing situation. Before the recent liberalization of Chinese markets, the country was overwhelmingly rural. Recently, however, rural dwellers have poured into the cities in droves for the better opportunities and pay, creating a frenzy of economic growth and urbanization with a pace unmatched in all of human history. Just from 2007 to 2017, according to Statista, the percentage of the Chinese population living in urban areas grew from around 42 percent to 57 percent of the population, representing a movement of fifteen percent of the Chinese population—over 211 million people—in just ten years.  The country’s urban population now accounts for around 820 million people, and by 2030, the McKinsey Global Institute estimated that the number will be over one billion, meaning almost another 200 million people, many of them migrants, will be urban dwellers.

This massive process of urbanization will likely, such as it has in the past with the already-existing rising demand for housing, inspire ever greater demand for housing and shelter, driving up construction and prices even more.

“Urbanization—moving families from the countryside to the city—is critically important to understanding China’s housing situation,” Stephen Roach, a professor of economics and East Asian studies at Yale University told The Politic.

And yet, that historic trend is barely mentioned in many articles from sources such as Bloomberg and the New York Times that discuss the coming collapse of China’s bubble. Roach also pointed out some other factors that don’t fit with the narrative that China is 2008 waiting to happen again. For example,  unlike the US ten years ago, the Chinese have not waived good lending requirements for home purchasers, and have clamped down on speculation, two things that the American government failed to do. The government in China has made it a priority to tackle any potential overheating of the market or bubble, with requirements such as a mandatory 20 percent down payment on houses, and a limit on the number of homes that one person can buy. This attempted to cut down on speculation, which was a prime reason why the US market in 2008 overheated as much as it did, as the government wants to keep “houses for families, not investors,” Roach said.

Professor Roach also addressed China’s “ghost cities,” which have become somewhat viral on the internet. These huge cities built in China which appear to have no one in them are often painted as an example of Chinese construction’s excessiveness and proof that the economy will inevitably slow down.

“You have to understand that China builds first and relocates people second,” Roach said. “I myself visited a ghost city before, on the eastern coast of the country. It now has a population of around 5 million people.”

Roach added that the only city that could be qualified as a ghost city and then didn’t end up populated was a city named Ordos, a community meant to be focused on mining in Inner Mongolia, and that even that recently has begun to become populated with a steady flow of people.

But if all these factors were true, and the Chinese economy as a whole isn’t in any true danger of collapsing due to their real estate bubble, then why there are so many mainstream media outlets in the West that paint China’s housing situation out to be the second 2008?

“Your guess is as good as mine,” Roach said with a shrug.

As a potential answer, Roach referred to works by Jonathan Spence, a retired Yale professor who had been a pre-eminent professor of East Asian studies, focusing particularly on Chinese society and economy. According to Spence, Roach said, the West has generally seen China as a whole only through the lens of western experiences and perspectives ever since the days of Marco Polo. Westerners have projected their own problems onto that of China as well, with the mindset that if Western countries experienced certain problems in their developments, then naturally China must as well.

“We went through a housing crisis, and China’s got a lot of homebuilding and somewhat speculative activities going on, therefore they’re going to go through a housing crisis like we did,” Roach said. “Maybe. Maybe not. But you’ve got to be more careful in utilizing Western experiences and risks to assess the same problems in China.”

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That being said, even if the Chinese housing market still has a long way to go before saturation, that doesn’t mean that skyrocketing housing prices aren’t negatively affecting the common Chinese citizen.

The summer between his sophomore and junior year, Bohan Lou returned to Shanghai to intern for NIO, a large automobile company in the country. Even surrounded by highly-educated, intelligent people whose jobs qualified them firmly as middle class or upper-middle class, one of his co-workers—who’d graduated from one of China’s top colleges and occupied a well-paying position at NIO—struggled to afford home ownership.

“He figured out that he could be working for sixty years and he couldn’t afford his first house,” Lou said. “It’s impossible.”

Luckily, Lou said, it’s still socially acceptable in China to rent houses and many people still do. Nevertheless, he said, this leads to a myriad of societal problems, one being such that many women won’t marry a man without his owning property or a car, which places many young men into a bind as they simply cannot afford the cost of where they live.

Lou also stressed that skyrocketing housing prices aren’t necessarily bad for everyone—in fact, it’s great for those who had already owned property back in the days when land and housing had been cheap. His own parents had been fortunate, where his father had, decades ago, scraped together as many family loans as he could to buy his first house in Shanghai. Lou said that it was one of the best investment ideas that his father had ever done, and the house is now worth over quadruple what the original price had been.

Barkley Dai ’20, another junior at Yale originally hailing from China, has another perspective on the housing situation, he told The Politic. Before attending Yale, Dai had lived in Changsha, a city of 7 million people and the capital of a province named Hunan. The city is considered a Tier 3 city by the Chinese government, meaning that it is a much smaller metropolis than a city like Beijing or Shanghai would be.

Dai, who studies statistics and economics and interned with a financial firm for a summer, said that he personally believes that China is heading for some type of recession in the long run, though not necessarily because of the housing market, but rather because of its coming demographic shift in age. Dai believes that China’s former one-child policy will do enormous harm to the Chinese economy in the long run, as once the older, larger generations grow old and die out, there will be a significantly smaller working generation left to expand the economy.

“We’re essentially Japan in the 1980s,” Dai opined. “The recession will happen at some point, though what time that point is, we still can’t say.”

As for the housing prices itself affecting regular people, Dai stressed that “as Chinese international students, we’re actually really different from the rest of the Chinese population. Many of us have very different perspectives of the Chinese government and the Chinese economy.”

Generally, according to Dai, Chinese international students come from upper middle-class to affluent families, as it is only those families that have the resources to provide their children with the proper education to get into a top American or European school. As such, he stressed right off the bat that some of his observations may be more unique to himself.

Having said that, Dai explained how it’s actually smaller cities in China having the highest rates of pricing growth in the country, since in his view, the largest cities have begun to reach a “ceiling where if the prices continue growing indefinitely at rates we’ve seen, the whole situation will just spiral out of control.” Because of this, his own family has been confident in investing in housing, with his parents thinking of purchasing new homes due to the fact that they will dependably go up in value for the foreseeable future.

When asked whether he wanted to stay and work in America or go back to China after graduating from Yale, Dai replied, “I think I will stay and work a few years in America in finance, and then maybe go back to a city like Beijing. Of course, before I do that I would have to look at China’s economy at that point, to see whether or not it’ll still be growing, with opportunities.”

And at the end of the day, that wait-and-see attitude expressed by Dai will have to be borne by us all.