Chinese Housing Market Bubble
As China’s home prices soar to record highs and well beyond the reach of ordinary citizens, the world watches closely as many wonder if the housing market might eventually crash. The global economy is still recovering from the financial crisis triggered largely by the collapse of America’s housing market, and it’s easy to see why investors and economists would worry that a similar boom-and-bust scenario in China could deepen the lingering slump.
Such concerns, though, are premature at best. Is there a bubble in China’s housing market? It’s possible, especially in major cities, such as Shanghai, Beijing, Shenzhen, and several provincial capitals. But China’s economy is far different from America’s; should a real estate bubble in China suddenly burst, the following differences could temper the risks of another global disaster:
China’s saving propensity might save the day
Declining home prices erode what’s called the “wealth effect.” If home prices drop, theoretically homeowners feel less wealthy so they consume less, which in turn, leads to an economic slowdown. The U.S housing crash in 2007 damaged the wealth of countless Americans, but such spillovers likely won’t be as deep in China because the country saves far more than most other countries.
Most Chinese don’t enjoy the kind of retirement plans and other social safety nets that most Americans do. So they tend to rely on savings and their children for financial security. In addition, they also save to help their children in their competition for marriage partners. As the ratio of males and females in the youth cohort rises due to gender-selective abortions, the competition for brides is getting fiercer for families with a son, and the competitive savings have risen in importance relative to the precautionary savings. Because of these factors, Chinese households save a greater fraction of their incremental wealth than most other countries.
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