Why are the Housing Price Bubble Still Existing in China?

    After the financial crisis, the housing price rallied to another peak in history. Why does the housing price bubble still exist recently? There are several hot reasons that were discussed among the society. I categorize them into three perspectives:

Macroeconomic perspective:

Supporting industry for the whole economy:

    As China is a developing country, many industries are not mature. Therefore, real property industry has become one of the most important supporting industries, which fuel the economic growth since 2003. It has been driving the whole economy development during the last decade. If this industry failed, Chinese economy may fall into great depression. Consequently, the government actually tends to protect the property industry from failing deliberately. This may be a very important reason for supporting the high housing price.

   

Supply perspective:

l  High land price: as I mentioned in the last post, the unbearably high land price is due to mainly two reasons:

§  The Chinese government has monopoly power of pricing the land

§  Local government increased the land price in order to hit the GDP target. In other words, land sales income takes the dominant position of local government income.

    Under such a high land price, the cost of real estate firms, therefore, increased dramatically and this does underlie a high housing price.

l  Cost of the construction materials increased

    The expense of these construction materials increased because of two reasons. One is the severe inflation. When there is inflation, the price of goods goes up. The other is the massive increase in demand of these materials. Since 2008, Chinese government invested 4 trillion Yuan into fundamental construction. This decision increased the demand of construction materials like steel, cement, and concrete sharply, which are also necessary materials for building houses. High price of these fundamental building materials definitely increased the cost of real estate companies and thereby leading to a high house price.

l  Corruption

    In China, a very interesting reason backed up the high house price is the official corruption. Some real estate dealers usually bribe some government employees and officials, giving them some perquisite or providing them with inside trading price of houses, to let them sell the land at a low price. These officials buy the house at a low price and can sell it at the market price which is much higher to earn massive profits. This official corruption phenomenon is so common that some of the officials or their relatives (dealers may also bribe the relatives of an officials) even own about ten houses individually. These people just hold these houses and wait for even higher housing price. This behavior definitely lacks the supply of houses in some extent, which helps pull up the housing price. 

Demand perspective:

 

l  Urbanization

    The urbanization process in China is growing very fast in recent years. More and more people during this period migrate from rural areas to megacities like Guangzhou, Shanghai and so forth. Migration of these people enhanced the demand of houses in big cities violently.
This rigid demand helps a lot in maintaining or even propelling the high housing price.  

l  Cultural pressures:

      

In China, there is a very weird but common thought among Chinese residents. That is if one does not own a house when he/she is about to marry, he/she will feel very mentally unstable. This cultural pressure imposes a strong mental pressure to people and let them feel that they must purchase a house in order to marry. This pressure pulls up the demand of house and thereby boosting the housing price indirectly.