Global Asset Bubbles and China’s Real Estate Market

Almost all major economies around the world have undertaken some form of quantitative easing since the US subprime crisis. From the second half of this year,low interest rate and even negative interest rate policies have been the norm. Meanwhile,the US Federal Reserve's plans to raise interest rates have been largely put on hold after a brief move in that direction. Global asset prices began a gradual rise after a period of severe volatility. Prices on global stock,bond and real estate markets have held at very high levels,though bulk commodities have traced a divergent pattern. Although China remains in a transitional period with slowing growth,domestic real estate prices have shown a remarkable rise over the past two years,particularly in first-tier cities. The following discussion is an effort to assess the risks in China's real estate market against this global background.

Zhong Wei,deputy editor-in-chief of China Forex Magazine,speaks to Dong Fan,Director of Real Estate Research Center at Beijing Normal University,and Lin Caiyi,chief economist of Guotai Junan Securities.

Zhong Wei: Welcome to this round table discussion. Prices of stocks,bonds and real estate have been moving steadily higher,though global asset prices have undergone significant turbulence since the US Federal Reserve announced its tapering of quantitative easing and a somewhat hesitant move towards higher interest rates. More recently,global asset prices have advanced once again. Taking the real estate market as an example,housing prices in key cities,including those in China,all hit new highs. In your opinion,is China＊s real estate market overheated? Is this unique to China or just part of a global trend in the real estate market?

Dong Fan: It is not correct to say that all global asset prices are rising,because the real estate markets in many countries have been relatively stable. In some markets,including Spain,Portugal and Greece,prices have been quite weak. We have seen sharp increases in housing prices in Australia,Canada,the US,the UK and parts of China in recent years. In the past year,housing prices in China's first-tier cities and most of the second-tier cities increased substantially. Prices in some markets,such as Shenzhen,reached surprisingly high levels,while those in the third- and fourth-tier cities remained weak.

Some of the price rises in the real estate markets of Australia,Canada,the US and the UK can actually be attributed partly to trends in China. Curbs on real estate purchases as well as tighter policies on mortgages in the domestic market have led some wealthy Chinese to buy homes overseas for investment purposes.

Lin Caiyi: I think real estate is more closely associated with the financial markets in China than in other countries. First,in China there is a dearth of domestic financial products and there are restrictions on cross-border capital movements. That makes real estate one of the few avenues for financial investment; it now accounts for more than 60% of the wealth of domestic residents. Second,the extent of home ownership in China is above the global average,and this reflects cultural attitudes and investment habits. Some people born after 1990 are willing to rent but most of them have been influenced by their parents in their perception of the desirability of owning a home.

Zhong Wei: If the global real estate market is heating up,what would you say is behind this? Is it related to low or even negative interest rates that stem from quantitative easing? We can see that US real estate prices have recovered to the levels seen before the subprime crisis 每 or even higher 每 even though toxic real estate assets have not yet been entirely cleared away. Are the bubbles in the real estate sector and those in the real estate-related financial market the same thing or are these two different problems?

Lin Caiyi: At present,it is liquidity that is driving housing prices higher in China and elsewhere. Almost all central banks,with the exception of the US,are taking measures to implement quantitative easing policies of some form. As for China,the 100-city real estate price index closely tracks the growth in M1 money supply. At the same time,there is no obvious correlation between housing prices and population growth. Therefore,the key factors in housing prices over the last five years have been quantitative easing and easier credit.

The real estate bubble and the bubble in the real estate-related financial sector are two different things. The former is determined by the ratio of housing prices to income and the ratio of prices to rental levels as well as the average number of homes per household,while the latter is more closely linked to the ratio of real estate mortgage loans and the scale of real estate credit-related derivatives. It was the real estate financial bubble that caused America's subprime crisis,but if a crisis emerges in China,a real estate bubble might actually be the reason.

Dong Fan: This round of recovery in the real estate market has been very strong in the first- and second-tier cities,and the launch of market-rescue policies has been the main reason. Curbs on home purchases and housing loans have been in place since April 2010 as a result of policy decisions by China's central government. However,there has been an easing of these restrictions since the second half of 2014. The policy reversal included less stringent restrictions on multiple home purchases and mortgages in most cities,as well as reductions in interest rates and bank required requirements. Local governments even rolled out subsidies for home purchases as well as tax breaks. The real estate market is now witnessing a full recovery,with prices in the first- and second-tier cities showing substantial gains. From the world's perspective,we must admit that this round of housing price increases is related to monetary policies in key countries. China,for example,has taken various measures to inject large amounts of liquidity into the market,but it has met difficulties in channeling capital from the virtual economy to the real economy. Large amounts of capital have moved into the stock and real estate markets,triggering sharp increases in prices.

In determining whether there is a liquidity bubble in the property market,many analysts look at the ratio of home prices to income levels and rental levels to sales prices,but this is not a totally reliable formula. Some academics contend that households can afford a home that is three to six times their annual income. This theoretical ratio originated in a World Bank study,and was later used by some scholars in Hong Kong who took historical data from a number of countries. But sources of income in developed Western countries are more transparent,while that is not the case in China where there is more gray income and income from assets alongside salaries. In this way,China's income index is somewhat skewed. Flaws also exist in calculating the ratio of rental levels to sales prices. Therefore,I believe that there is no bubble in China's real estate market.

Zhong Wei: In China,the real estate markets in the first-tier cities are heating up,while the third- and fourth-tier cities are quite cool,particularly for non-residential properties. Inventories are also quite high. In your opinion,will the situation improve over the next two to three years? How many years it will take to reduce the inventories and bring the real estate market back to normal?

Dong Fan: We may have to make serious efforts to reduce those inventories over the next four to five years. I think it may prove very difficult to boost the property mark