Evidence of Real Estate Bubble: When standing at the crossroads

 

The development of China's real estate is at a crossroads. Whether it will continue to rise or start to fall in the future still needs continuous discussion. 

It is generally believed that a bubble is a large deviation from the actual value, that is, an inflated price.

Homeownership advantage, saving traditions, stable investment, undeveloped financial market, debt, and loosening of government policy are all potential causes of the existence of the housing bubble. Can also be seen as the sparks in the "Fire Triangle" proposed by William Quinn.

Evidence one:  The Bubble Triangle

                              Bubble Triangle

Source: Boom and Bust

    Under the government's expansionary monetary policy, the money supply and bank loans have expanded significantly. Lower lending rates bring more credit to the housing sector. Even the highest level of "hot money" in Chinese history.

MONEY/CREDIT

Source: Sciencedirect

    Building a public housing system and developing a financially supported market increases the marketability of housing.

 

    Against the backdrop of record sales in 2020, the real estate industry has been riding a wave of optimism and speculation so much that 2021 ends with some of the biggest players defaulting on billions of dollars in debt.

Evidence two: Rent-to-sale ratio

 

    In China, the rent-to-sale ratio of houses is very low. Taking some big cities as an example, the house price is close to 500 times the monthly rent.

Price-to-rent ratio

Source: FT

Evidence three: House price to income ratio

House price to income ratio

Source: Nordea

    From the figure, we can infer that a Chinese with a median income takes much longer to buy a house than in Western countries.