Is China repeating Japan's mistakes?
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First, property prices are out of reach for ordinary wage earners. Real demand has declined. The prices keep rising because speculative money continues to pour into the market. Also, real estate development has pushed into far-away suburbs where prices are still affordable. The spread of price increases to suburbs and local cities is a sign of overheating in prime areas.
Second, monetary policy has encouraged such speculation. The interest rate was kept low in Japan in the late 1980s, because the authorities wanted to curb appreciation of the yen. The interest rate has been kept low in China since the collapse of Lehman Brothers in an attempt to stimulate domestic demand. Ample liquidity and encouragement from the monetary authorities to expand bank credit contribute to enlargement of a bubble.
Third, a lack of alternative domestic investment opportunities and various restrictions on foreign investment in private sectors have channeled funds into the real estate sector.
Fourth, the land supply is limited. In Japan, various tax measures and land use restrictions limited large-scale development. In China, land is owned by the State, and the authorities can control how many properties are sold. The authorities may have an incentive to keep the prices high.
Of course, there are differences too. Overall growth opportunities in China today seem much greater than they were in Japan in the late 1980s. China still has low-income rural areas where capital and labor have not been fully mobilized for economic growth. High economic growth may continue for another 20 years. The People's Bank of China has recently tightened regulations on the loan-to-value ratio and reserve requirements on banks in an attempt to curb bank lending. However, on balance, similarities outweigh differences.
Will the bubble burst soon in China? And will this lead to a collapse of the economy and a repeat of the sorry performance of the Japanese economy in the 1990s?
Given the rate at which property prices have increased in China, a slowdown seems inevitable. Speculators who count on high returns will not be satisfied with limited price increases and will start to unload inventories. That will turn the market from bull to bear. Eventually, speculators will not be able to find buyers, and - based on what happened in Japan - prices will decline.
