Property Bubble: The Chinese approach
Rising prices of real estate in China and a weak secondary market for real estate leading to residential and commercial establishments remaining empty has sent strong signals of an inherent property bubble being created in China. The macroeconomic impact is that there is a positive wealth effect at the peak levels of prices. However, a downfall of property prices leads not only to a negative wealth effect for the investors, but also jolts the financial system that provides secured loans against property.
Although the policies directed towards cooling off the property prices in China have been much focused and are far sighted, the underlying weaknesses to ensure the sustainability of such move are worrisome. Even if property prices cool down in a few years averting a property bubble burst, a lack of proper safeguards in financing such projects successfully may spell a disaster for China’s economy. This would only reinforce the expectation of a “hard-landing” for the Chinese economy.
The need of the hour for China is to allow sufficient incentives to the real estate developers to build affordable housing units while maintaining minimum quality of houses to tackle this situation. A balanced monetary policy would be very essential as excess liquidity would neutralize the effort taken by the government to control prices, while a lack of liquidity would come in the way of meeting the real demand for housing, rather than speculative demand. On the demand side, the government needs to regulate the demand by giving sufficient flexibility to buyers to borrow from traditional banking system, while discouraging buying for speculative purpose