The crisis is similar to the crisis that occurred in the U.S. Market known as the subprime mortgage crisis of 2008. This paper argues that there will not be the same type of economic crisis in China because in China the government owns all the banks and they require really large down payment on homes. In Japan, there is an aging market and a high urbanization rate, but there is no threat of the same collapse that the housing bubble of 2008 in the United States experienced.
The question in this essay is whether the boom of urban housing prices will cause China to experience the same subprime mortgage crisis that the U.S experienced in 2008, or will it mimic the collapse of the housing market in Japan? In this essay, I do not think that there is a chance that the market will be the exact same as it was for the United States in 2008.I will go on to explain why this is the case, and how it is that China might experience a collapse, but the bubble is not yet ready to be popped. Therefore, China will not experience the subprime mortgage crisis now, but perhaps in the far future it will experience a housing crisis that exceeds the 2008 crisis in the United States.
One thing to keep in mind is that compared to the United States’ subprime mortgage crisis in 2008, there were a few things that acted together to create the crisis. Part of the United states crisis was caused by the fact that the FHA allowed very small down payments on homes. Down payments were as low as 3% to 4% of the total cost of the house. But what happened was that bankers found ways to make money off of selling subprime loans. Soon there were a lot of people who had homes, but really could not afford them. These loans were made by bankers who wanted to create larger loans from a bunch of these smaller subprime loans.
Worldwide, people are worried about the Chinese property bubble because the Chinese are big time investors in expensive properties all over the world (Dent). The Chines have a major portion of the world’s economy tied up in their economy so a Chinese collapse of property bubble in the same way that the United States had a collapse would be globally devastating (Dent). Since China is a major support of the international market, it would not be a good thing if the Chinese housing bubble were to burst. But this paper argues that it will no burst because it does not have the same types of conditions that the housing bubble in the United States had in 2008, and it does not have the same problem that Japan has of vacant houses or of the credit bubble: “Unless supply of new houses is restrained in view of the demographic trends, the already serious problem of vacant houses across the country will only grow more severe…” (Japan Times Editors). In Japan, it is the demographics of the country that are causing the real estate bubble, whereas in China it is the economics of the country that is creating a bubble. But I argue that the bubble is not ready to burst.
The subprime loans of 2008 in the United States were really a way for bankers to earn more money, and what happened was that mortgage brokers helped buyers falsify income certifications, and their credit reports. Then, the banks would not really examine the applicant for their buyers. A subprime loan is a loan that is made to a creditor with less than good credit. In fact, they can have really bad credit and still qualify for a loan in 2008. The entire idea behind these loans was not to qualify anyone for real, but instead, to just qualify everyone and then the housing prices could go up too. In 2008, what happened in the United States is not exactly what is happening in China. If anything, the bubble is more like the Japanese market.
In China, buyers pay about 20% to 30% of the price of the home in a down payment. Banks are usually government owned, so the requirements to qualify for the loan are very strict. This is not the same as it was in the United States in 2008, therefore, it is not the prediction that China will have the same sort of collapse as the United States had in 2008. It is also not the case that China will have the same crisis as Japan. In Japan, lots of credit was extended to people who should not have had the credit. This caused a massive credit bubble. The concern is that China has both a credit bubble and a property bubble. In China, there is more land, so there is room for expansion. The properties in Japan are on a small island and there is not much room for expansion. This can lead to bubbles because in China there should not be a bubble: “The worry is that China repeats Japan’s mistake of not reining in excess credit and shutting down insolvent borrowers quickly enough, exacting longer-term damage to growth in the world’s No. 2 economy” (Curran and Dong).
Here are some important differences between Japan’s economy and China’s: In Japan, there is only one way that some one can own land privately, whereas in China, land is owned collectively or it has state ownership (Global Times Editors). The urbanization rate, in Japan, before the collapse was above 80%. Different from Japan, the urbanization rate in China now is much lower. At the end of 2015, the urbanization rate of China is 56.1%, increased less than 2% than 2014. On the other hand, the population structure of China now is younger and their per capita income is lower. The Chinese government will mediate the collapse of the economy because it owns the properties. And the government already has tried to act in order to save its economy, just as the United States government acted to save its economy before the Great Depression- they purchased their own country’s stock (Dent).
However, with all that I have argued, there is quite a bit of evidence that there is a large housing bubble (Appendix A). Furthermore, the prices on new homes have exponentially been going up for years: “New home prices rose on average 9.2% year-on-year across China’s 70 major cities” (Hsu). (Appendix B). Therefore, I must say that there is something that is amiss in the economy of China, however, the bubble will not burst for a long time. Both Japan and China share the opacity of bad debt and the government backed shadow banking that exists in both countries will prevent an immediate burst of the property bubble in China, at least according to my calculated predictions. The way that the housing market burst in the United States in 2008 is different from what is going on in China and Japan. The housing bubble in the United States was created out of banker’s greed, whereas the bubble in China will come from a progress towards the inevitable bursting of a housing balloon that has too many people in its demographic.
- Curran, Enda, and Emma Dong. “China’s Red-Hot Property Market Risks Missing Lessons From Japan’s Crash.” Bloomberg News, 28 Sep. 2016, www.bloomberg.com/news/articles/2016-09-28/china-s-bubble-trouble-risks-missing-lessons-from-japan-s-crash. Accessed 17 Dec. 2016.
- Dent, Harry. “China’s Property Bubble Echoes Subprime Crisis.” Economy and Markets Daily, 01 Aug. 2016, economyandmarkets.com/markets/foreign-markets/china-housing-bubble/. Accessed 17 Dec. 2016.
- Global Times Editors. “China’s property bubble more perilous than Japan’s.” Global Times, 24 June 2016, www.globaltimes.cn/content/990229.shtml. Accessed 17 Dec. 2016.
- Hsu, Sara. “China’s Housing Bubble Is Finally Here — As Expected.” Forbes, 11 Oct. 2016, http://www.forbes.com/sites/sarahsu/2016/10/11/chinas-housing-bubble-is-finally-here-as-expected/#1e5a5429308a. Accessed 17 Dec. 2016.
- Japan Times Editors. “The Coming Crisis in Housing.” The Japan Times, 24 Sep. 2015, www.japantimes.co.jp/opinion/2015/09/24/editorials/coming-crisis-housing/#.WFWP-vkrIps. Accessed 17 Dec. 2016.