Are House Prices Rising Too Fast in China?

Recently, the market prices of houses have behaved in a strange way in the Chinese market. The housing costs have tremendously increased in the major cities of China over the past year. High house prices have discouraged the middle-income earners from owning homes. In fact, Miles (2017) asserts that the average price of a home in China has increased to 100,071 dollars in comparison to the average price of a house of 100,030 dollars in the United States. In fact, the younger generation, who rushes to buy homes and apartments, has created the bubble. Thus, this paper discusses the effects of the increase of Chinese housing prices on the economy of China.

Effects of the High House Prices in the Banking Sector

The increase in Chinese housing prices has significantly affected the lending practices of Chinese banks. The rapid increase in the costs of houses makes financial institutions perceive a rise in the value of the assets they own. Therefore, the Chinese banks have become more confident in increasing their lending and reducing their reserve ratios at the same time. The extended housing boom has encouraged Chinese banks to give out more mortgage facilities. Thus, the banks have benefited from the high-interest rates that they charge due to high demand for the mortgages.

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Moreover, the increase in the Chinese housing prices has significantly affected the lending to other sectors e.g. commercial lending for businesses. The reason for a decrease in lending to other sector is the fact that the Chinese banks are benefiting from the high lending opportunities created by the housing bubble in the country. Chakraborty, Goldstein, and MacKinlay (2016) mention that the banks have been constrained to raise new capital that enables them to offer mortgage opportunities to their clients. Such a constraint has adversely affected Chinese economy as other significant sectors have lacked the capital for development.

Wealth Effect on the Chinese Economy

The wealth effect examines the impact of the increase in the value of the houses on the Chinese householders. The rise in the costs of the houses provides more wealth to the householders. In this case, the householders are the Chinese homeowners. As a result, the householders have become more confident to spend and borrow funds because of their ability to sell their houses in cases of emergency. Thus, the Chinese homeowners have expanded their trade in other segments of the economy. In fact, the increase in the housing prices enables the householders to source funds from the financial institutions, since the houses act as the guarantees in the case of a default. In this case, the increase in the home prices produces a positive impact on the Chinese economy.

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High prices of houses in China have also caused an increase in the equity withdrawals that is a new system of borrowing that is secured on the dwellings, which have not been invested in the home market. Through equity withdrawal, the increase in the Chinese housing prices has enabled the homeowners to acquire more mortgages. Thus, the Chinese homeowners have been able to spend bigger loans on other important items. Thus, the increase in housing prices has increased the consumer spending in the Chinese economy. The rising prices of houses culminated in a positive equity withdrawal in the past. For instance, the increase in the price of Chinese homes resulted in the addition of fourteen billion dollars into the Chinese economy thanks to equity withdrawal in 2006 (Lan, 2014). The injection of funds is advantageous to the economy, as it increases the consumer spending.

Inflation

Actually, the increase in the prices of the Chinese houses has also led to inflationary effects. The inflation has primarily been caused by the steady growth Chinese economy has witnessed over time. Besides, the economy has recently been operating close to its full potential. The increase in consumer spending puts inflationary pressures on the economy. Therefore, the doubling of the Chinese housing prices has culminated in significant increases in the prices of other commodities. Because of housing bubble, the spending effects on the Chinese population have led to a major change in the retail price inflation that has significant implications for the monetary policies of the country.

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The inflation created by high prices of houses has affected the household consumptions and Chinese economic growth in general. In fact, the inflationary rates have given rise to the issues of non-affordability of homes in China. A house is regarded to be a key asset in the wealth of Chinese household. Therefore, the Chinese population is motivated to purchase homes; such a motivation contributes to high inflation in the country. Thus, abnormal costs of Chinese housing are more likely to spur the inflation rather than economic growth.

Impacts on China’s Interest Rates

The effect of interest rates relates to the inflation experienced in the Chinese economy due to the housing bubble. The prices have caused the inflation to rise above the national target. As a control measure, the Chinese government has increased the interest rates to combat the inflation through the monetary policies that extensively affects the economy. High interest rates have affected the decrease in economic growth.

Effects of the House Price on Urbanization

High cost of houses in the major cities has affected the push for urbanization by the Chinese government. Even though most individuals have blamed the registration system of households for preventing both farmers and migrants from moving into the urban centers, they actually just cannot afford high prices of houses in the towns. In fact, most migrant workers spend at least half of their incomes on housing. In the long-run, high costs of the real estate market will also have adverse effects on the businesses located in the urban areas. Negative effect will be produced because of the reduction in urban employment opportunities that translates into reduced government revenue.

Another impending effect of the increasing Chinese housing prices is the threat of the burst of housing bubble. If the housing bubble bursts, both China and other nations will suffer substantial consequences. International Monetary Fund (IMF) has estimated that one percent reduction in the real estate investment of China has the potential of reducing the international Gross Domestic Product by approximately 0.05% (Yan, 2014). Thus, the effect of rising housing prices is not only constrained to China. The burst of the housing bubble will produce significant effects on different economies of the world.

Geographical Inequality

High costs of housing have increasingly caused geographical inequality in China. The evidence of inequality represents the conditions some of the Chinese workers live in. The workers cannot afford proper housing. Moreover, high poverty levels among the lower class members of the Chinese society have contributed to a shortage of workers in such cities as Beijing. Thus, a huge gap exists between the homeowners and the low-class society members. High prices continue to complicate the life for the low-class of the population. Thus, the number of homeowners has significantly decreased in recent years in China. In fact, most people have resorted to private renting because of their inability to afford the mortgages. The first time buyers directly face the effect.

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In the light of the presented effects, significant steps need to be undertaken in order to mitigate the constant rise in the prices of houses. The Chinese leaders have the responsibility of admitting the presence of a problem in the housing sector. The Chinese authorities have the capability of moving the country away from the implicit growth of asset prices that has been witnessed recently. The same way the Chinese government has adopted the “new normal” concerning a decreased economic growth, it should embrace a “new normal” in the prices of the homes so that loosening or tightening activities are not imposed on the economy every time there is an unsustainable growth. Thus, the leaders must admit that the decrease of prices and values of the assets in Chinese economy is healthy at times. In fact, a bubble burst is likely to become disastrous for both the Chinese and the global economy.

Conclusion

The increase in Chinese house price has significantly affected the economy of the country. The constantly increasing costs have resulted in the creation of a housing bubble. The research paper has discussed the effects of the increase in Chinese housing prices on the banking sector. Actually, the Chinese banks have increased the lending activities because of the high-interest rates charged. Another effect is the wealth effect on the Chinese economy. The increase in the housing prices has resulted in the creation of more wealth for the Chinese householders. However, high prices of the Chinese homes are directly related inflation. Thus, the rise in the costs of housing has caused the increasing consumer spending. Therefore, a continued increase in the costs of Chinese housing is detrimental to the society of the country.

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