Where's the big real estate bubble?

by Dong Fan

There is no real estate bubble in China. Rising property prices reflect the basic law of economics. Different from the supply-demand relationship of ordinary commodities, supply in the real estate sector is always subject to strict controls in terms of urban planning, land supply, building and planning targets, while demand can at most be influenced by fiscal and monetary policies.

The demand for housing, a special commodity without substitute, couldn't be transferred because of rising prices. The demand in the realty sector is experiencing straight expansion because of the increase in population and rising need for houses. Hence, rising housing prices reflect a kind of law. Prices drop only when a country encounters some special situations such as wars, plague outbreak, devastating earthquakes, special political developments, economic recession, strict but misleading regulations and tax adjustments.

Apart from being subjected to the basic law of economics, real estate prices are influenced by a range of conditions endemic to China. These include a huge population and limited land, acceleration in urbanization, high-paced economic growth, widening gap between urban and rural residents and diminution of family size, as well as the ongoing reform in residential units' regulations, financial system, social welfare network, urban-rural stratum consciousness and the strengthened intention of buying on debt. All these factors strain the real estate's supply-demand relation.

"Property bubbles" refer to a situation in which rising land and housing prices, as a result of speculation, reach unsustainable levels relative to people's incomes and other economic elements. Thus scholars and economists who believe there is a big bubble in China's real estate market are wrong. Under a planned economy, the authorities kept the housing prices low through administrative measures. But after China embraced market economy, housing prices are supposed to jump up like a spring that had been depressed forcibly.

Some people argue that because of the high housing prices the price-to-income ratio in major cities is much higher than the international standard and beyond ordinary people's affordability levels. Hence, "the property bubble is very serious". What they don't know is that the scholar who first came to this conclusion has already denied it. In foreign countries, rural houses are included in the list of commercial housing, while in China a large number of low-cost houses are not considered part of commercial housing. Overseas, land supply is competitive under private ownership, while in China governments at all levels monopolize it within their jurisdiction. There are many small townships in foreign countries. In contrast, China has a lot of large and medium-sized cities. And we know that the size and nature of cities influence housing prices greatly. Since so many factors are different at home from those overseas, the price-to-income ratio cannot reflect the real situation.