Housing is on everyone’s mind. The collapse of housing bubbles can be very costly.
- In Japan, house prices rose by about 40 percent during the mid-1980s; the collapse was followed by a ‘lost decade’ in which incomes did not grow and house prices fell by over 40 percent.
- In the United States, house prices increased by about 30 percent between 2001 and 2006; their collapse was followed by the global financial crisis.
The collapse of the housing sector can often lead to a broader collapse of the financial sector. And the cost to the government of cleaning up the mess can be very high.
For several years, analysts have been expressing concerns about China’s housing market. Despite some reversals, house prices in China have continued their long upward march over the past decade (Chart 1), prompting questions about what the future holds. At a conference last month in Shenzhen, leading analysts of China’s housing markets provided some answers. Organized by the IMF in cooperation with the Chinese University of Hong Kong, Shenzhen, and Princeton University, the conference spotlighted new data sets on China’s housing markets painstakingly assembled by leading experts.
The bottom line: The steady increase in China’s house prices at the national level masks tremendous variation at the city level.
The findings from these leading experts: It’s supply and demand. First: there is substantial heterogeneity across cities in the balance between housing supply and demand. At one end, housing supply has outpaced demand in the interior part of the country. On the other end, housing demand has outpaced supply in most major eastern markets, such as Beijing, Hangzhou, Shanghai, and Shenzhen. Second, markets such as Beijing, despite their strong measured fundamentals, should be considered somewhat risky because homes there trade at very high multiples of rent.