NCPA - National Center for Policy Analysis

Demystifying the Chinese Housing Boom

July 31, 2015

China's housing-price appreciation from 2003-13 has been enormous -- stronger than during the recent U.S. housing bubble and more on the order of Japan's property boom in the 1980s.   Would a drop in house prices wreak havoc on China's financial markets and its economy more generally?  A number of factors suggest that the risk of a price decline is modest and that the effects of a decline would be muted, according to a National Bureau of Economic Research paper.  These factors are:

  • Household Income Increases.  The rise in Chinese housing values has been accompanied by an equally strong rise in household income.
  • Staying Put.  Chinese have shown remarkable resilience in holding onto their property.
  • Down Payments.  Buyers in China typically put down more than 35 percent on a home, which reduces their mortgage payments and insulates the buyers and the banks that lend to them from a plunge in property values.

However, the authors warn that the housing market is unlikely to trigger an imminent financial crisis in China, but may act as an amplifier of initial shock if there is a sudden stop in the Chinese economy.  Chinese home-buyers, especially those whose incomes fall in the bottom 10 percent of homeowners, take on extreme financial burdens to buy homes.  They pay up to 10 times their annual disposable income to buy a property. Households can make that work as long as income continues its rapid growth, but there are signs that China's economy is slowing.

Source: Hanming Fang et al., "Demystifying the Chinese Housing Boom," National Bureau of Economic Research, April 2015.

 

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