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The Sunday Paper – Is There a Housing Bubble in China?

Well, is there?

The authors of the paper highlighted this week, Tianhao Zhi et al, from the Business School of the Sun Yat Sen University, start with trying to pin a definitive tail on the donkey in terms of defining what a ‘bubble’ is.

They believe property markets can have two types of bubble. The first is when prices become detached from local fundamentals like wages and local GDP growth. To cure that kind of bubble the government should consider supply-side solutions. The second type is when speculative mania takes hold and prices start to deviate significantly from established trends. This can be identified by applying a Log Periodic Power Law Singularity or LPPLS test. If the particular market tests positive to an LPPLS test authorities should step in with fiscal measures to slow the market down as they have done recently by extending holding periods in many cities to between 3~5-years.

What’s important is to take a city by city approach. China is too big, and these days too complex, for any one-size-fits-all solution to be appropriate or effective. The paper highlights how ineffective the, what were believed to be then Draconian measures applied in 2010, policies turned out to be.

So, back to the question. Does China have a home price bubble? The paper looks at the nine cities of Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin, Hangzhou, Chengdu, Wuxi and Zhengzhou from the period from January 2008 to June 2017 and concludes nearly all these cities have signs, of one sort or the other, of a too frothy market.

Two markets in particular seem ripe for correction in 2018; Shanghai and Shenzhen. Only one market shows no sign of either type-1 or type-2 bubble characteristics; Guangzhou. Prices there can be fully explained by local economic conditions and haven’t raced away in recent years.

My own two cents here is to observe that bubbles don’t necessarily correct via crashes so there’s no reason to get out of Dodge if you’re (like me) an investor in the sector. A period of price suppression and some faster building to address supply-side issues will do just as well. Policies we see, in fact, in operation in many Chinese cities today.

You can read the paper in full by following this link Is There A Housing Bubble in China?

Happy Sunday.

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