English 160 - Unaffordable Home: The Outrageous House Prices in China

Beidi Tan

Professor Eighan

English 160

Dec.7, 2014

Unaffordable Home: The Outrageous House Prices in China

        Over the past ten years, a change in property value has sparked change in the Chinese workforce. China is facing an economic crisis, which has a potential risk of causing a second Great Depression. The economic crisis is happening because of the endless rising value in houses. The workforce, as a related element, is forcing to face one of its biggest challenge. Millions of people across the country begin to worry that they have the probability to lose their financial security due to the unstable economy.  Although some people do not see the increasing property value as an issue, and they believe the heat will settle down eventually, in reality the increasing property value is the factor of the real estate bubble. The real estate bubble has unimagined effects on not only the individual country’s economy, but also the global economy. And the heat will calm but with a crushed market in the end. Even some people do not think the impacts from the real estate bubble will affect them so much but the truth is the economy, and the workforce are extremely close to each other.

Owning a house or an apartment is a significant matter to most people. In certain cultures, it is necessary for people to have their homes. For instance, China is one of the countries that sees a house as a need. Therefore, a home has turned into an essential instead of a luxury. In additional to that, the demands on houses and apartments keep increasing because of the sustained growing population in China.

According to the business dictionary, real estate bubble is defined as “economic bubbles characterized by quickly increasing property values … and then are followed by a decline in the property value” (What is).  The term (real estate bubble) indicates that the bubble will pop at the end of the cycle, but economists estimate that the threat to economic growth is devastated if the bubble pops. An economist Philip Pilkington states that “The Great Recession, on the other hand, was more directly caused by a fall in property investment” (Pilkington). Pilkington has pointed out that the bursting of the real estate bubble would lead to another financial crisis and even a worldwide recession. Pilkington has used the statistic from the International Monetary Fund’s Global Housing to support his analysis, which is suggesting that the individuals’ purchasing power is below the rising house price (Pilkington).

A side effect from the rapid rising house prices is straightforward, which is redistributing income from first-time buyers to people who already own houses. Other than that (redistributing income), the real estate bubble is considered as a threat to the country’s economic growth. Though many people may wonder the relationship between the real estate bubble and the economic growth. In this case, the rising in property value can stimulate economic activity through two channels (Pilkington).

According to economists, the first channel is called the wealth effect (Pilkington). The wealth effect indicates that people who already own houses would feel wealthier because of the rising in property value (Pilkington). They (people who own houses) would have the illusion of having more money since their property value is rising. Under this circumstance, people are more likely to spend more money on consumer purchases (Pilkington). People who are under the wealth effect may even remortgage their property in order to spend their money on consumer goods, which the houses have turned into ATMs (Pilkington).

Another channel is called Tobin’s Q for new dwelling investment (Pilkington). Basing on Phillip Pilkington’s description, the second channel is leading the economic growth more directly. Because of the rising in real estate prices, investors build more houses in order to earn more revenues (Pilkington). So it (building more houses) requires more workforces and construction materials, which it is the key channel to burst the economy and employment (Pilkington). But this channel (Tobin’s Q for new dwelling investment) is also the key for causing a sharp decline in property prices, and eventually leads to a recession (Pilkington).

        It is obviously that both channels are inflating the economy like a balloon, but the expansion cannot be incessant. Once the expansion has reached the balloon’s limit, then the bursting will happen without any doubt. The United States housing bubble in 2006 and ’07 should consider as a warning to the world, especially to those countries with fast increasing in gross domestic product. China is considering as one of the highly unstable countries, which has been growing so fast during past ten years. The Chinese economy looks like a rocket that has been madly increasing, but many people start worrying about it now. According to Lesley Stahl (a CBS news’ correspondent), she mentions that the Chinese economy could grow so fast is because of the real estate and construction are the most important sector (Stahl). She (Lesley Stahl) points out the housing bubble in China might be the largest bubbles in human history (Stahl), which is extremely dangerous to the country (China).

The prices of houses/apartments in China have been soaring up without limit for the past ten years, and it (the price) looks like it certainly will not stop. While most Chinese see the unstoppable rising, they start panicking and seeking for a way out. Unfortunately, there is no way out of this real estate bubble. The cost of buying a condo is shocking, not even mention the cost of buying a house. In big cities like Beijing or Shanghai, it costs over three-million dollars to buy a three-bedroom apartment. In reality, the price of an apartment/a house is still rising uncontrollably.