Download china-the-housing-bu..

CURT TRUMAN
School of Sustainability
Arizona State University
THE REAL ESTATE BUBBLE:
MADE IN CHINA
For my research project I will focus on the Chinese Housing Bubble and
the future of sustainable Green development in China.
I would like to
investigate thoroughly how the Harrod-Domar Growth Model in theory may
have triggered aggressive real estate development in China which quickly
escalated into a nationwide housing bubble.
In my research I ask the
question: Is there a correlation between a country’s saving rates and
government investment policies?
If the housing bubble was not triggered by
Harrod-Domar stimulus model – then what cause such rapid growth and
development in China?
In the global financial markets, housing construction and development is
a key driver of growth - based upon total funds invested - in measuring a
country’s gross domestic product (GDP).
1
I would like to examine how the
Chinese Central Government implemented and “steered its way out of
communism” to set policies to stimulate growth in response to weakening
global financial markets and the U.S. financial market meltdown in 2007.
RESEARCH QUESTIONS:
1. As part of China’s stimulus approach did a Harrod-Domar Economic Model
trigger aggressive development and create a Real Estate Bubble?
2. With massive saving available for investment, was a loose monetary policy
responsible for such massive construction and building which created a Real
Estate Bubble?
WHAT IS A REAL ESTATE BUBBLE?
A real estate bubble is characterized by rising prices of real estate
(housing and land) until the price increase becomes unsustainable and
inventory levels reach surplus levels. The market then reacts when housing
prices take a dramatic fall. That is, the market crashes! It means there is too
much housing inventory and no buyers and properties are over-priced.
And in
China's case, there is now what the news media calls “Ghost Cities” - with
millions of vacant apartments with a 4 to 7 year supply of housing inventory.
2
INTRODUCTION:
The history of China can be traced back over 5,000 years.
It’s the
largest country in the world with a population of more than 1.357 billion people.
Four times the size of the United States. Its current GDP is approximately
$9,240 trillion (2013), with GDP growth of 7.7% (2013) and inflation at 2.6%
(2013).
China is now the largest economy in the world, taking the number one
position from the United States.
(World Bank, 2014).
INDICATORS TO MEASURE A HOUSING BUBBLE:
I use the following economic indicators to measure the accelerated
housing markets in China:
A. I looked at savings rates.
B. I looked at investment in relation to savings i.e., Solow Model.
C. I looked at GDP growth and percent of development.
D. I looked at vacancy rates and inventory.
Question: So how did China develop a housing surplus and construction
boom? Some industry professionals refer to China's real estate bubble as the
result of a "loose monetary policy" set by the Central Committee, which fuelled
increased borrowings by the local governments, builders and industrial
companies.
These policies quickly aided massive construction and building
projects – building entire “Ghost Cities” in a relatively short period of time.
The Chinese Government thought that a stimulus program was good idea to
kick-start the economy and trigger investment and growth.
3
The rise in real
estate prices in China was triggered by credit infusion in 2009 to enhance
economic growth amidst US financial crisis.
Harrod-Domar model at work?
Or was it?
So, in theory it was the
I argue that it was actually a
neoclassical economic model lead by Robert Solow (1956).
clear connection between savings and economic growth.
Solow reveals a
The model indicates
that ‘higher savings’ leads to ‘higher investment’, which in turn leads to higher
economic growth.
The presupposition is that higher savings contributes
positively to economic growth; therefore, this has led to strong macroeconomic
policy recommendations for development in many countries (Sothan 2014).
See figure 1: [China’s Savings v Investments]
Up until 2007, the average savings rate in the United States fell as low as
1%. What does that actually mean?
It means that Americans consume more
than they actually produce. The U.S. is a nation of borrowers, but from whom
do we borrow? China.
China is a nation of “savers” where national savings
averages 50 percent of income.
Rather than consuming more that it
produces, the Chinese consume only about half what they produce (Welker,
2011).
Hence, China is sitting on a huge pile of Cash. Big Cash.
And, I
propose the Central Government Planning Committee saw an opportunity to
kick-start some construction and development projects to activate GDP growth
pledged against its large savings reserves.
Okay, so perhaps there is a link between savings and investment; and,
in China’s case, a direct correlation to a massive real estate development and
construction boom.
However, no one anticipated that there would be
Hyper-Growth. What I call Monstrous Growth!
4
The wild-west of speculative
borrowing and building.
And in response, the Chinese Governments’ only
concerned was with economic development and annual GDP growth.
government wanted to hit its target growth rate of 7.5 percent.
The
I propose
again, “They didn’t care how they got there, they just wanted growth.”
Currently there are 64 million properties and vacant apartments in
China, as reported by Lesley Stahl of 60 Minutes, a CBS news magazine.
Stahl
reports that “China is building houses, cities and districts with no one in them”
(CBS, 2013).
“The Chinese housing market is massively oversupplied and
overvalued,” according to Adrian Brown, reporter for SBS ONE TV Australia, “A
bubble waiting to burst,” he says.
Currently, financial sources say, best guess
estimate is that China has a housing market supply of four to seven years of
inventory.
In the United States we currently have a six month housing
inventory supply.
So, to put this in perspective, If we had 64 million vacant
homes in the United States, that would be the equivalent of the entire
population of California (38,332,521) and Texas (26,448,192) combine - being
vacant (U.S. Cenus data).
That’s 20% of the entire U.S. population! And,
consider this, what if California and Texas were not occupied for between four
to seven years? How do you think that would affect the economy and our
sustainable future?
In theory, this construction growth model was a good idea - so thought
Central Government Planning Committee.
However, this strategy took an
unsustainable turn, in that it left millions of citizens vulnerable.
It ignored
simple land ethics; ignoring citizen’s ability to adapt to rapid expansion,
building, urbanization and ignoring the relationship between man and the
5
environment.
It ignored the displacement of low-income people and millions
of rice farmers torn from their fields.
It forced millions and millions of Chinese
to jump between adaptation and transformation strategies in the blink of an
eye.
In Aldo Leopold’s book, A Sand County Almanac “The Land Ethic,” He
writes:
“A land ethic reflects the existence of an ecological conscience; this in
turn reflects a conviction of individual responsibility for the health of the
land. Health is the capacity of the land for self-renewal. Conservation is
our effort to understand and preserve this capacity” (Leopold. 1949).
The Chinese government ignored the value of land and man’s
relationship to the environment in this construction and housing boom. The
government allowed building at such a rapid pace, that it created massive
vacant urban cities.
However, the damage of this kind of speculative building
goes far beyond financial relationships and emphasis on the environment and
development.
The human toll, in a housing market crash, has consequences
on the subsidiary construction trades as well. That is, contractors, construction
workers, architects, cement haulers, steel workers and day labors will all be
affected by massive unemployed and underemployment in a crash. In addition,
what about the hundreds of millions of rural farmers, who farmed the rice fields
and tended the livestock, who lost their properties to make way for these
massive speculative building sites?
And above all, how about the millions of
low income people who were never afforded the opportunity of low income
housing in the vast inventory of 64 million vacant apartments?
6
URBANIZATION AND RURAL LIVELIHOODS:
As part of my research, I looked at the Livelihood Framework in relation to rural
vs. urban migration due to the massive housing supply and rapid urbanization
in China.
How would the Capital Pentagon play in the dynamics of rural vs.
urban migration movement based on displacement from government land
grabs and the surplus housing inventory?
I looked at China’s economy
through a Sustainable Livelihood Framework.
“A livelihood comprises the
assets (natural, physical, human, financial and social relations) and that
together determine the living gained by the individual or household” (Ellis,
2000, p. 10).
After an extensive review of the literature, I found the livelihoods of rural
Chinese farmers had been massively disrupted by the accelerated urbanization
in China; and, the impacts of displacement and exclusion from urban life due to
the Hukou housing registration system (Siciliano, 2012). Due to the household
registration system, rural migrant workers that have lost their land after
expropriation are often excluded from social benefits and usually only have
access to low-wage urban jobs (Li, 2011; Chan, 2010). Economic growth and food
security play a fundamental role as the main ultimate drivers for disrupting
rural livelihoods in China and exposing rural migrant farmers to aggressive
domestic land grabbing policies (Siciliano, 2012).
Domestic land grabbing is defined as the process of land expropriation
and displacement put in place by governments with their county borders to
supposedly enhance development.
While development-induced displacement
occurs all over the world, China is responsible for a large fraction of such type
7
of displacement and resettlement projects. Urban sprawl and land
commodification for food security and agricultural modernization are the
main consequences of domestic land grabbing in the country (Siciliano, 2012).
On a positive note, in the last 30 years, cities with abundant labor, cheap land
and good infrastructure, played a key role in lifting a billion people out of
poverty (World Bank, 2014).
Ian Johnson, a reporter with the New York Times, said in his article
“China’s Great Uprooting: Moving 250 Million into Cities,”
“China is pushing
ahead with a sweeping plan to move 250 million rural residents into newly
constructed towns and cities over the next dozen years – a transformative
event that could set off a new wave of growth or saddle the country with
problems to come” (Johnson, 2013).
The ultimate goal of the government’s modernization plan is to fully
integrate 70 percent of the country’s population, or roughly 900 million people,
into city living by 2025.
The primary motivation for the urbanization push is to
change China’s economic structure, with growth based on domestic demand for
products instead of relying so much on export.
In theory, new urbanites mean
vast new opportunities for construction companies, public transportation,
utilities and appliance makers, and a break from the cycle of farmers
consuming only what they produce (Johnson, 2013).
“If half of China’s
population starts consuming, growth is inevitable,” said Li Xiangyang, Vice
Director of the Institute of World Economic and Politics.
According to a report by the World Bank, The Development Research
Center of China’s State Council, “Building denser, rather than larger cities, will
8
help China cut down on traffic congestion, air and water pollution and the
maintenance cost for infrastructure services.” In addition, the World Bank
reports, with more efficient, denser cities, China can save some $1.4 trillion in
infrastructure spending – or 15% of last year’s GDP. It will also help preserve
the amount of farmland still available, currently close to the ‘Red Line’
considered to be the minimum needed to ensure Food Security (World Bank,
2014).
CHINA’S SUSTAINABLE FUTURE: GREEN BUILDING STRATEGIES
How do local governments implement Green Building strategies into
future sustainable housing developments in China?
And, can policies be
implemented to guide China towards a Sustainable Green Building future?
Since its economic movement toward a more progressive form of
communism, i.e., (socialism), the world is watching China’s new policies
toward sustainable building and construction practices. That is, how it will
design its future place in history via sustainable Green building and
urbanization policies.
I believe China is in a great position to become a world leader in
Sustainable Building and Design - and by implementing the right
Policies now, I think China just might become a world leader in the Sustainable
Movement. My hope is that China can avoid a financial crash, reduce rural
displacement and migration due to aggressive urbanization; and, take part in
‘proactive’ Sustainable Green Building strategies to become a world leader in
sustainable building and design.
9
Jonanthan Woztel, in his article “How Green are China’s Cities“ for
McKinsey & Company, found the cities he studied in China have expanded
economically while improving their sustainability.
He called these cities
‘sustainable growers’ the vanguard of China’s Urban Development.
cities built their economies while protecting the environment.
These new
Hence, they
could serve as role models for other urban centers throughout China.
He cited
four key policies and programs which moved these newly designed urban cities
toward lasting Green and Sustainable performance. They include the following:
(1) Industrial restructuring linked to land renewal;
(2) Green urban planning;
(3) Transparent standards and charges; and
(4) Integrated large-scale recycling programs (Woetzel, 2011).
In addition, Woetzel said, “Urban administrators in these cities had
restructured government bodies to enhance cross-departmental coordination
and to promote long-term sustainable initiatives.”
Woetzel developed a
unique measurable index to review China’s overall sustainability.
It’s called
the Urban Sustainability Index (Woetzel, 2011)
It’s based on 18 indicators, grouped in five categories:
A. BASIC NEEDS: Indicators are water supply, housing, health, education.
B. RESOURCE EFFICIENCY: Indicators are power consumption, domestic water
demand, industrial waste recycling, heavy industry’s share of GDP.
C. ENVIRONMENTAL CLEANINESS: Indicators are air pollution, industrial
pollution, wastewater treatment, domestic waste management.
10
D. BUILT ENVIRONMENT: Indicators are urban density, mass-transit, public
green space, a buildings’ heating efficiency.
E. COMMITMENT TO FUTURE SUSTAINABILITY:
Indicators are green jobs,
investment in environmental protection (Cohen, 2012).
A MACRO LEVEL SUSTAINABLE APPROACH:
Similarly, I examined how the Chinese Government might intervene; on
the Macro Level with new polices and alterative growth models.
The Chinese
Government is using ‘alternative economic growth strategies’ in responding to
the housing crisis and urbanization.
The Chinese government finally stepped
in and set some guidelines to try and ease the market inventories.
Property
Buyers must now meet these new policies for purchasing additional
apartments.
They included:
1. Increasing the down payment requirement from 20 to 30 percent for
the purchase of a first new home;
2. Increased the down payment requirements from 40 to 50 percent for
a second home; and,
3. Discouraged non-owner occupied homes for third homes; and,
4. Prohibiting mortgages on third homes. (RIS Policy Brief #56)
MICRO LEVEL SUSTAINABLE APPROACH:
In addition, other policies to slow the markets include new "rules to
restrict property developers from hoarding land or housing units. For example,
local authorities have started implementing a policy allowing repossession of
11
land that has been idle for more than two years. This will curb hoarding by
developers expecting price gains" (RIS Policy Brief #56).
In addition, other
corrective steps to slow speculative building, include the government directing
local governments to cut the target of new housing units to be constructed.
Similarly, the ceiling on private profits of the developers in these projects has
been set at no more than 3 percent - which may limit foreign participation in
these projects and compromise on quality of construction to cut corners.” (RIS
Policy Brief #56).
Another key strategy, from a Micro level perspective, is denser
urban planning would curb local governments’ reliance on land-based financing
and limit the risk of unregulated borrowing. (World Bank, 2014).
In conclusion, perhaps the Chinese government can learn from the U.S.
housing market crash and continue to take proactive steps ease the burdens of
a financial crash; and furthermore, include the rural farmers and low income
people as part of this new bold housing policy.
According to Bert Hofman,
chief economist for the World Bank’s East Asia and Pacific Region said, “As
China’s urban population is projected to rise to about one billion, more than 70
percent of the country’s population by 2030, a new model of urbanization that
is focused on quality, not quantity, could help launch China onto a the path of
sustainable urbanization” (World Bank, 2014)
.
12
Figure 1: [China Savings vs. Investments]
Source: globaleconomicanalysis.blogspot.com/2012
13
BIBLIOGRAPHY
Brown, Adrain (2011). SBS ONE TV Australia. “CHINA’S GHOST CITIES” Air
date: March 20, 2011. www.sbc.com.au/
Chan, K. W. (2011) The household registration system and migrant labor in
China: notes on a debate Population and Development Review 36 (2) pp.
357-364
Cohen, Gaelle (2012) “Sustainability in China,” China Europe International
Business School, p., 9-10.
Ellis, Frank (2000) Rural Livelihoods and diversity in developing countries
(Oxford: Oxford University Press).
Johnson, Ian (2013). The New York Times, “Leaving the Land China’s Great
Uprooting: Moving 250 Million Into Cities.” June 15, 2013. www.nytimes.com
Leopold, Aldo (1949) A Sand County Almanac: Essay, “The Land Ethic”
Oxford University Press.
Li, X. (2011) Farmland grabs by urban sprawl and their impacts on peasants’’
livelihooh in China: An overview, paper presented at the Global Land Grabbing
Conference. Brighton 6-8 2011.
RIS POLICY BRIEF No. 56, April 2012. “Property Bubble: the Chinese
Approach.” RIS: Research and Information System for Developing Countries.
www.ris.org
Siciliano, Giuseppina (2012) Rural-Urban Migration and Domestic Land
Grabbing in China: Drivers, Impacts and Trade Offs. Conference Paper, Global
Land Grabbing II Oct 17-19, 2012, Cornell University.
Solow, Robert, Walras, L., and Jaffe, W (1956) Elements of Pure
Economics, Econometrica, 24(1).
Sothan, S. (2014), Causal relationship between domestic savings and
economic growth: Evidence from Cambodia. International Journal on
Economics and Finance, 6 (9), 213-220.
Stahl, Lesley. (2013) CBS: 60 MINUTES NEWS MAGAZINE, “CHINA’S REAL
ESTATE BUBBLE”. WWW.CBSNEWS.COM original air date: March 3, 2014,
rebroadcast, Aug 3, 2014
14
U.S. CENSUS BUREAU. (2014) WWW.CENSUS.GOV
Welker, Jason. (2011) “Balance of Payments, Balance of Trade, Captial.”
Nov. 7, 2011 Http://www.welkerswikinomics.com
Woetzel, Jonathan. (2011) “How Green Are China’s Cities?”
Quarterly, Sustainability Index, Jan 2011
World Bank, www.WorldBank.Org.
15
McKinsey
Source: World Development Indicators