4. Housing Finance in the Emerging Economies
The previous chapters focused mostly on the United States, Europe, and Canada. In this chapter, we turn to the emerging and newly industrializing countries. We start by comparing the depth of mortgage markets in a wide range of countries and then look at the characteristics of housing finance in emerging countries. Finally, we focus in detail on the housing market in China, as it has been totally transformed in the last 30 years or so.
Mortgage Markets in Different Countries
Figure 4.1 shows the depth of mortgage markets in different countries, grouped by region, in terms of the ratio of outstanding mortgages to gross domestic product (GDP), based on the average from 2001 to 2005.1 On average, the developed countries in Europe, North America, and the Pacific have much greater depth than the emerging markets.
Source: V.C. Warnock and F.E. Warnock, “Markets and Housing Finance,” Journal of Housing Economics (2008): 7.
Figure 4.1 The depth of mortgage markets in different countries, by region.
Europe has a great range of ratios. In Italy, the ratio is quite low, at 13.1%. At the other end of the spectrum, the Netherlands has the highest ratio, at 82.7%. The average for the region as a whole is 43.6%. This is about the same as Canada, at 42.9%, and somewhat higher than Japan, at 35.7%. The U.S. is significantly higher, at 67.4%. Most of the other countries fall somewhere in between, except for New Zealand, at 78.2%.
In contrast, the emerging and newly industrializing countries have much less depth. In Africa and the Middle East, South Africa and Israel have the greatest depth, at 22%. All the other countries are at less than 10%, with most being less than 5%. The story is similar in Eastern Europe, with the maximum being 10.5% in Estonia. In emerging Asia, Malaysia (28.3%), Taiwan (26%), Korea (20.8%), and Thailand (15.5%) all have fairly deep markets. However, the remaining countries do not. China has only 10%.
In Latin America, the highest ratio is in Brazil, at 14.8%, but the rest of the countries’ ratios are 10% or less. In short, most emerging and newly industrialized countries do not have much depth in the way of housing finance.
Table 4.1 shows the source of funding for home mortgages in emerging and newly industrialized countries. You can see that, in most countries, the main lenders are banks and specialized housing finance companies. Most of the funding comes from deposits.
Table 4.1 Source of Funding for Home Mortgages in Emerging and Newly Industrialized Economies (2008)
Note: LTV = Loan-to-value ratio; AHML = Agency for Housing Mortgage Lending.
Source: IMF Global Financial Stability Report, Durable Financial Stability: Getting There from Here, April 2011.
For Croatia, Hungary, and Poland, the deposits and mortgages are in foreign exchange. Covered bonds are used to a significant degree in the Czech Republic, Hungary, and Russia, but not much elsewhere. Mortgage-backed securities are used in Mexico and Malaysia, but even there, the amounts are not large. In other countries, their use is negligible.
Perhaps the most striking fact about the mortgage market characteristics in Table 4.2 is the extent of government support. Many countries have upfront subsidies to first-time buyers and subsidies through savings accounts. Low-income households are widely supported. Housing finance funds and loan guarantees are provided by 11 out of 17 of the countries. Slightly fewer countries, 9 out of 17, allow tax deductions of mortgage interest. Only two countries allow capital gains tax deduction. The other interesting item in the table is the high level of permissible loan-to-value ratios in most countries.
Table 4.2 Mortgage Market Characteristics in Emerging and Newly Industrialized Economies (2008)
Note: MBS = Mortgage-backed securities.
Source: IMF Global Financial Stability Report, Durable Financial Stability: Getting There from Here, April 2011.
We next consider the case of China in depth. The transformation of the housing system there from one in which the government provided all housing through employers to a market-oriented one provides a singular example of change and innovation. Also important is the question of whether a bubble exists in Chinese real estate.
China
The IMF predicts that, in 2016, China, the most populous country in the world, will become the largest economy in terms of purchasing power parity (PPP).2 Housing for China’s 1.34 billion people is clearly a cornerstone of its economic activity.
The last 30 years have seen a major change in this dimension. When China had a centrally planned economy, the state provided housing through work units. Over time, the market has gradually replaced this system. The great worry now is that there is a bubble in property prices in at least some parts of the country, and many Chinese are unable to afford housing. In this chapter, we start by considering how China has transformed its system of housing.
Property Prices in China
In a popular television series called The Snail House, a young couple struggles to obtain a good apartment to live in. The series is filmed in Shanghai. Hai Ping, the heroine, graduated from one of the best universities in China and works hard in a white-collar job. Her husband, who is also well educated, doesn’t make much money. Hai Zao is Hai Ping’s younger sister. She helps by borrowing money obtained through corruption from her (older) married lover, Song Siming, who is the secretary to the mayor. He eventually commits suicide while under investigation by the police. The series is a heady mix of sex, wealth, spicy humor, and intrigue.3 Many young people in Shanghai and other major cities in China can empathize with the struggling characters in The Snail House.
Figure 4.2 shows the path of property prices in Shanghai relative to household disposable income. For the first six years, housing prices tracked disposable income except for a small blip upward in April 2005. After this, prices stayed fairly constant as household income caught up with the new level.
Figure 4.2 Shanghai housing price versus disposable annual income per capita, normalized and adjusted by CPI, 2002 = 100.
At the end of 2008 and beginning of 2009, prices took off relative to disposable income until the end of 2010. This is the “bubble” that many have talked about. At the start of 2011, prices fell sharply before they stabilized, and household income began to catch up again. As we discuss shortly, the fall was perhaps as a result of macroprudential policies that the Chinese government introduced to reduce property prices.
Figures 4.3, 4.4, and 4.5 show the same data for Beijing, Guangzhou, and Shenzhen. For Beijing, house prices tracked disposable income until the end of 2006. They then jumped above income and stayed at a mostly higher level until the end of 2008. In 2009, they rose with a jump at the start of 2010. As in Shanghai, prices peaked at the end of 2010 and then fell sharply at the start of 2011 before stabilizing somewhat.
Figure 4.3 Beijing housing price versus disposable annual income per capita, normalized and adjusted by CPI, 2002 = 100.
Figure 4.4 Guanzhou housing price versus disposable annual income per capita, normalized and adjusted by CPI, 2002 = 100.
Figure 4.5 Shenzhen housing price versus disposable annual income per capita, normalized and adjusted by CPI, 2002 = 100.
The experience of Guanzhou, shown in Figure 4.4, is different than that of Shanghai and Beijing. Property prices fell behind disposable income until the end of 2006. They then tracked each other fairly closely until the end of 2009. During 2010, there was a dramatic rise and then a fall at the beginning of 2011 before stabilization. Shenzhen had yet another different experience, as shown in Figure 4.5. Here the two series followed each other fairly closely until the end of 2005. But then prices jumped at the start of 2006 and again at the beginning of 2010. After that, they were very volatile.
Figure 4.6 gives the plot of property prices and household disposable income for the country as a whole. You can see that, until 2007, property prices and disposable household income moved together. After that, property prices mostly rose, but not as much as income. This appeared to rule out a bubble in housing prices for China as a whole.
Figure 4.6 National housing price versus disposable annual income per capita, normalized and adjusted by CPI, 2002 = 100.
Although that may be true, many argue that there is a bubble in property prices in some of the major cities, such as Shanghai and Beijing.4 The evidence shown in Figures 4.2–4.6 is crude, as disposable income is just one indicator. However, it does seem that there was a significant rise in prices in a number of property markets in 2010 and then a retrenchment at the start of 2011.
Given the fact that China has the second-largest economy in the world, a housing bubble, if one exists, is a problem not just for China, but also for the rest of the world. We consider a wider range of evidence next.
A Brief History of Housing Provision in China (1949 to the Present)
Soon after the People’s Republic of China was founded in 1949, all urban residential units were nationalized. State-owned housing was funded through the annual State Budgetary Funding. Units were allocated to individual households through employers, which were state-owned enterprises (SOEs) or some type of collective or other state-run work unit.5
In 1978, the government decided to reform the housing system. The aim of this was to gradually transform the nature of the housing system from a socialist one to a private one. As part of this reform, governments of all levels were to be freed from their housing finance burden and housing shortages were to be alleviated. In 1979, a trial privatization of state-owned residential housing units took place in several coastal cities. The government expanded it in stages until it eventually covered the whole country. The first private housing developer was founded in 1980 in Shenzhen. In the early stages, private-sector housing units were for foreigners and employees of non-state-owned enterprises, but this changed over time.
The key legal change came in 1988. The constitution adopted in 1982 clearly outlawed private ownership of land: “No organization or individual may appropriate land, buy, sell or lease land or unlawfully transfer land in other ways.” In 1988, the following sentence was added just after this one: “The right to the use of the land may be transferred in accordance with the law.”6 The maximum term for the transfer of such land-use rights is 70 years for residential property, 40 years for commercial property, and 50 years for industrial and other types of property. Currently, it is not known what will happen with these leases and the structures built on the land when they expire. One possibility is that they will be renewed with another payment to the government or that they will be extended for at least some period in return for payment.
The Chinese system of land-use rights also serves as a partial control on zoning. The differing types of permission limit what can be done with the land. Land-use rights have been sold for only a limited amount of land, and they are not the only control on land use. In addition, the Land Administration Law requires governments at all levels to draw up plans for land use.
During the ten years after the 1998 change in the constitution, a gradual transition took place from the old system to the new private ownership system. Housing units were sold to residents at below-market prices. Work units were required to gradually eliminate their allocation of living units to employees. In 1998, the State Council issued the 23rd Decree, which required work units to stop developing employee housing.
As a result of these changes, the portion of the population living in private-owned or rented housing units went from 9.2% and 6.2% in 2000, respectively, to 16.3% and 12.2% in 2005.
An important part of the transition from state-owned housing is that private housing is supplemented with public housing targeted at low- and middle-income households. These units are rented or bought from local governments at heavily subsidized prices. In recent years, however, the construction of this type of housing fell substantially because of the lack of financial incentives.
Table 4.3 shows that the percentage of affordable housing fell from 21.8% of initiated construction space in 2000 to 5.2% in 2008. Gao (2010) interviewed managers from the largest real estate developer in China, Vanke. The developer explained that the profit for affordable housing was ¥200/m2, compared to ¥17,000/m2 for townhouses and ¥37,000/m2 for single-family homes.7
Table 4.3 Total Building Space of Newly Built Residential Houses for Middle- and Low-Wage Earners in the PRC (1997–2008)
Source: L. Gao, “Achievements and Challenges: 30 Years of Housing Reforms in the People’s Republic of China,” ADB Economics Working Paper Series No. 198, Asian Development Bank, 2010.
The central government has tried to force developers to build more affordable housing. For example, in 2006, the central government implemented a “90–70” policy requiring that 70% of the total area in each new housing project be allocated to units of 90m2 so that they were affordable. However, developers found ways around these restrictions by, for example, designing adjacent “90–70” units so that they could easily be combined to create luxurious apartments after purchase. Local government officials often helped in such schemes, to stimulate revenue and local growth.
To counter the fall-off in the construction of affordable housing, the Chinese government committed in its latest Five-year Plan to building 36 million new units of low-cost housing by 2015.8 It remains to be seen whether this will be successful.
Is There a Bubble?
So far, we have considered the relationship between property prices and household disposable income. This is just one indicator of whether a bubble exists. What does a wider range of evidence suggest?
Table 4.4 shows the housing price to per capita net income in the ten largest cities in China, as well as in the U.S., Australia, the U.K., and Canada. It can be seen that house prices are much higher based on this measure than in the four other countries. The lowest ratio in China (20 for Wuhan) is more than twice the next highest ratio for the other four countries combined (9.6 for the Sunshine Coast in Australia). The highest ratio (27 for Xiamen) is four times that of London at 6.9, which is often regarded as one of the most expensive cities in the world in terms of property prices.
Table 4.4 Cities with High Housing Price–to–Income Ratio Values (2007–2008)
Source: L. Gao, “Achievements and Challenges: 30 Years of Housing Reforms in the People’s Republic of China,” ADB Economics Working Paper Series No. 198, Asian Development Bank, 2010.
Cultural factors partially explain the high price-to-income ratios in China. For example, many young people in China regard owning a home as a precondition to starting a family. Chinese parents are often willing to help in this acquisition. Given the one-child policy that has been in operation in China for many years, this means that up to four incomes can be devoted to saving for an apartment or house. In addition to this kind of cultural factor, the lack of good saving instruments in China contributes to the attractiveness of saving to buy property. Deposit accounts give low interest rates, and the stock market has been risky in recent years.
In our discussion of Figures 4.2–4.5, we examined the increase in house prices in four major cities. Over the years, the quality of housing can change significantly. Economists adjust for these changes using what are known as hedonic price indices. One important issue is the extent to which this kind of adjustment would change our conclusions. In a careful study, Wu, Gyourko, and Deng (2011) produced a constant quality price index for newly built private housing in 35 major Chinese cities from the first quarter of 2000 to the first quarter of 2010 (see Figure 4.7). You can see that house prices nationwide increased substantially on this basis.
Note: Hedonic models are used to control for quality changes in underlying samples of newly built private homes in 35 major markets in China. Real indices are created by deflating with the CPI series for each market. Aggregate indices are computed as the weighted average of the local market series, with transactions volume between 2000 and 2008 as the fixed weight.
Source: Wu, Gyourko, and Deng (2011), Figure 1.
Figure 4.7 Constant quality price index for newly built private housing in 25 major Chinese cities (Q1 2000 to Q1 2010).
Wu, Gyourko, and Deng also carefully measured the ratios of the price of properties to the household incomes in that area in eight cities (see Figure 4.8). The price-to-income ratios reached their highest levels in Beijing, Hangzhou, Shanghai, and Shenzhen.9 Figure 4.9 shows the price-to-rent ratios in the same cities. Hangzhou had the sharpest increase, with the ratio more than doubling, from 31.8 in 2007(1) to 65.5 in 2010(1). The price-to-rent ratio in Beijing increased almost 75%, from 26.4 in 2007(1) to 45.9 in 2010(1). The increase for Shanghai was similar. Shenzhen also had a significant increase. The remaining cities, Chengdu, Tianjin, Wuhan, and Xian, have lower price-to-rent ratios, but these have been increasing over time.
Source: Wu, Gyourko, and Deng (2011), Figure 12.
Figure 4.8 Price-to-income ratios in eight major Chinese markets (1999 to Q1 2010).
Source: Wu, Gyourko, and Deng (2011), Figure 11.
Figure 4.9 Price-to-rent ratio in eight major Chinese cities (Q1 2007 to Q1 2010).
Based on this and other evidence Wu, Gyourko, and Deng concluded:
[M]ultiple parts of the evidence presented in this paper suggest the potential for substantial mispricing in Beijing and other Chinese housing markets. Pricing seems very risky in the sense that only modest declines in expected appreciation seem needed to generate large drops in house values absent offsetting changes in rents or other factors.
The magnitude of the increase in land values over the past 2–3 years in particular in Beijing is unprecedented to our knowledge. Not only do these increases post-date the Summer Olympics, but the recent price surges in early 2010 suggest a relationship to the Chinese stimulus package which itself is temporary. More broadly, the sharp rises in price-to-rent and price-to-income ratios since 2008 in Beijing and many of the other large coastal markets look to be very difficult to explain fundamentally. (p. 21–22)
In an IMF study, Ahuja, et al. (2010), reached a similar conclusion.10 They argued that although the evidence suggests no bubble in the country as a whole, some markets, such as Shanghai and Shenzhen, have prices that do seem to be well above fundamentals.
Thus, considerable evidence points to a bubble in some Chinese real estate markets. The drops in prices since the start of 2011 noted earlier may be the first sign of the bursting of the bubble. What may have caused these bubbles? We start with the mortgage finance system and then consider supply and demand factors.
Mortgages in China
It is often suggested that financial innovation in the mortgage market in the U.S. was an important factor in the development of the bubble in the real estate market. The argument is that loosening of underwriting standards, particularly in the subprime market, helped inflate the bubble. Without the innovation of the subprime mortgage, the suggestion is, the bubble would have been mitigated or eliminated.
The case of China provides an interesting example because its mortgage market involves simple, straightforward mortgages.11 Basic mortgages are 80% or less than the appraisal value or purchase value of the house, whichever is lower. The payment-to-income ratio must be 70% or less. In addition, a requirement states that the ratio of total other assets, including savings accounts, stock market investments, vehicle value, and so forth, to the value of the mortgage should be at least 25%. The term of the mortgage must be 30 years or less, and the sum of the borrower’s age and the mortgage term must be 65 years or less.
The interest rates on mortgages in China are adjustable. Mortgages with a term of more than five years are considered long term. The interest rate on them is tied to the six-month bank lending rate set by the People’s Bank of China. If this rate changes, mortgage rates are adjusted starting from January 1 of the following year. Short-term mortgages are for five years or less. The interest rate on them is 27 basis points less than on long-term mortgages. Mortgage principal and interest payments can be made by equal or progressive installments.
As the Chinese real estate market boomed in 2007 and 2008 before the demise of Lehman Bros. in September 2008, the Chinese government imposed macro prudential controls, outlined in Table 4.5, to try to limit price appreciation in the real estate market. These involved, among other things, tightening the conditions on mortgages for second and third homes. After the collapse of Lehman Bros. and the slowing of the economy, the government reversed some of the tightening measures on mortgages and introduced supportive measures for the real estate market. After the real estate market started to boom again, the government tightened those measures at the end of 2009. Table 4.5 lists these supportive and tightening measures.
Table 4.5 Property Market-Related Policies in Mainland China
Note: Some tightening measures launched in September and October 2010 in national and city levels are not displayed in the table. Basically, these measures reinforced those introduced in April 2010. In addition, more than ten major cities (Beijing, Shanghai, Hangzhou, Guangzhou, Shenzhen, Nanjing, Ningbo, Fuzhou, Xiamen, Tianjin, Haikou, and Sanya) set the upper limits of property units that a household can purchase.
Source: A. Ahuja, L. Cheung, G. Han, N. Porter, and W. Zhang, “Are House Prices Rising Too Fast in China?” IMF Working Paper, 2010: 10–274.
Given the simple nature of mortgages in China, it seems that financial innovation has not played a role in the price boom there. The amount that can be borrowed has been strictly limited at 80% of property value or less. Moreover, the mortgages have simple adjustable rates. There are none of the extreme kinds of mortgages, such as subprime loans or mortgages with low teaser rate, that attracted so much criticism in the U.S.
An important difference between China and countries such as the U.S. and the U.K. is the low amount of mortgage debt relative to nominal GDP. Table 4.6 shows that, from 2004 to 2007, the total amount of mortgages in China was about 10% of the GDP. This compares to around 40% in France and Spain and 80% in the U.S., U.K., Australia, and New Zealand. Moreover, the growth rate in China, at 2.4%, was considerably lower than in the other countries. However, in 2008–2009, the growth rate in mortgages, at 16.1%, was considerably higher than in the other countries.
Table 4.6 Mortgage Market Depth and Growth
Source: Ahuja et al. (2010), p. 21.
We next consider supply and demand factors that play a role in the property market in China and may have contributed to the bubble.
Supply Factors in the Real Estate Market
The ownership structure of land and the way in which it is supplied for residential use is very different in China than in the U.S. and most other countries.12 In China, the state owns urban land and collectives own rural land. This dual land ownership structure leads to the formation of three types of land markets:
• The land ownership market. Also called the land confiscation market, this refers to compulsory acquisition of land sites by the government for public purposes, with reasonable compensation offered to the owners. Confiscation of rural land is the largest part of this market and a source of incremental urban land.
• The primary market for urban land use rights. The government sells land-use rights to other parties, and the buyers are allowed to use the sites within a specified period.
• The secondary market for urban land-use rights. A buyer acquires land rights in the primary market and then resells these land-use rights to other parties.
The proportion of the population residing in urban areas grew steadily from 20% in 1990 to 45% in 2009. Despite the huge population and the large fraction residing in urban areas, the proportion of land devoted to residential use in China is relatively small: 0.33%, compared to 3.1% in the U.S., for example. As Figure 4.10 shows, the other proportions for land use in the two countries are not that different.
Source: National Land Use Planning Outline (2006–2020); Ruben N. Lubowski, “Major Uses of Land in the United States,” 2002, from L. Yin, “Is China’s Property Market in a Big Bubble?” Working Paper, China Center, Oxford University, 2010.
Figure 4.10 Land use in China and the U.S.
The other key factor in understanding the supply side of China’s real estate market is that local government keeps the revenue from land-transfer fees. This has become a major source of income. Table 4.7 shows the percentage of these land-transfer fees in local GDP and local revenue in 2006 for a range of cities. You can see that the percentage of local GDP ranges from 6.97% for Chongqing to 0.40% for Qinghai, with the average being 3.12%. As a percentage of local government revenue, the land-transfer fees constitute a high of 96.05% for Fujian and a low of 6.04% for Qinghai, with the average being 40.96%. Thus, land-transfer fees represent a substantial revenue source for local governments.
Table 4.7 Percentage of Land-Transfer Fee in Local GDP and Revenue (2006)
Source: L. Gao, “Achievements and Challenges: 30 Years of Housing Reforms in the People’s Republic of China,” ADB Economics Working Paper Series No. 198, Asian Development Bank, 2010.
Because local governments keep the revenue from the land-transfer fees, they have strong incentives to restrict the supply of land and keep the price high. Figure 4.11 illustrates an apparent relationship between the supply of land and the increase in property prices. Thus, supply factors have arguably played an important role in driving property prices higher. Until local government finances are reformed so that they can cover their needs from sources other than land-transfer fees, it seems likely that land supply will continue to be restricted and its value kept higher than would otherwise be the case.
Source: CREIS China Real Estate Index System, from L. Yin, “Is China’s Property Market in a Big Bubble?” Working Paper, China Center, Oxford University, 2010.
Figure 4.11 Growth of land acquisition area and property prices.
Demand Factors in the Real Estate Market
The discussion of property prices at the beginning of the chapter suggests there was a significant surge in some places in 2009. Deng, Morck, Wu, and Yeung (2011)13 argue that this was the result of China’s stimulus package that was introduced to counter the effects of the financial crisis. The stimulus package was announced in the fourth quarter of 2008 and amounted to 4.4% of GDP, compared to 4.8% for the U.S. stimulus package. Despite a fall of 44.8% in net exports in 2009, estimated to have cut GDP by 3.9%, Chinese GDP growth on an annualized basis in the four quarters was 6.2%, 7.9%, 9.1%, and 10.7%. The government ordered state-owned banks to lend large amounts. Much of this lending went to large state-owned enterprises (SOEs), as these were regarded as having little credit risk. The SOEs, in turn, spent a large amount of this money in real estate purchases, and this appears to have pushed prices higher. Using data on residential land auction prices from eight major cities, the authors documented that prices rose about 100% in 2009, controlling for quality variation. Moreover, prices rise when SOEs are more active buyers.
Wu, Gyourko, and Deng (2011) also found that SOEs appear to play an important role in driving up land prices. They found a statistically and economically strong positive correlation between land auction prices in Beijing and the winning bidder being a central government–owned SOE. Other factors equal, prices were around 27% higher in this case.
Thus, supply factors were not the only important contributors to the rise in property prices—demand factors were also. In the former case, distortions imposed by the system of local government funding tended to restrict supply. In the latter case, the government’s stimulus package nudged prices higher. Although the supply factors are likely to be long lived, the demand factors associated with the stimulus package are not. This also provides part of the explanation for why housing prices fell in some cities at the start of 2011.
The Dangers to the Economy from a Bubble
Given that the financial crisis that started in 2007 originated with the fall of property prices in the U.S. housing markets, an important question for China is how much the Chinese banking system and economy could be hurt by a fall in property prices. We consider this complex issue next.
Gao (2010) points out that real estate developers obtain about 50% of their finance from banks at the national level (refer to Table 4.6). Moreover, in recent years, around 50% of new loans made by banks were residential mortgages (refer to Table 4.7). Although there has certainly been considerable growth in loans to real estate developers and residential mortgages, as Ahuja, et al., point out, the key question is how exposed the Chinese banking system is to a collapse in property prices. They suggest that the direct exposure is low. In late 2009, mortgage loans and loans to developers accounted for less than 20% of total outstanding loans, compared to more than 50% in the U.S. or in Hong Kong.
Although the direct exposure is low, the indirect exposure can be higher because many industries depend on the real estate industry for their demand. For example, the metal smelting and rolling sector, the nonmetal mineral products sector, and the chemical sector are closely linked with the construction industry.
Figure 4.12 summarizes banks’ direct exposures and their indirect exposures through industries that rely heavily on construction. Direct exposures of loans to developers and residential mortgages are 18.5% of the total, while real estate dependent industries are 23.8%. Although direct exposures are not high, adding indirect exposures gives significant total exposure.
Source: A. Ahuja, L. Cheung, G. Han, N. Porter, and W. Zhang, “Are House Prices Rising Too Fast in China?” IMF Working Paper, 2010: 24.
Figure 4.12 Distribution of outstanding loans (2009).
Finally, Ahuja, et al., point out another indirect exposure: Many loans are secured by real estate collateral. A fall in real estate values means that these loans are no longer guaranteed. The precise impact of this indirect channel is difficult to gauge, however.
The total exposure of the banking system to the real estate sector is difficult to pin down. Combining all the different types of exposure of the banking system to property prices suggests that a sharp fall could undermine financial stability.
Endnotes
1 Based on Table 2 from V.C. Warnock and F.E. Warnock, “Markets and Housing Finance,” Journal of Housing Economics 17 (2008): 239–251.
2 See www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx. The IMF predicts that, in 2016, GDP PPP will be $18,975.744 for China and $18,807.547 for the U.S.
3 See http://blog.sciencenet.cn/home.php?mod=space&uid=5414&do=blog&id=289449 for a full account of the plot. For excerpts, see www.youtube.com/watch?v=wHsSiCvnNko&feature=related.
4 J. Wu, J. Gyourko, and Y. Deng, “Evaluating Conditions in Major Chinese Housing Markets,” forthcoming in Regional Science and Urban Economics, 2011.
5 This section draws on Wu, Gyourko, and Deng (2011); G. Stein, “Mortgage Law in China: Comparing Theory and Practice,” Missouri Law Review 72 (2010): 1,315–1,352; and L. Gao, “Achievements and Challenges: 30 Years of Housing Reforms in the People’s Republic of China,” ADB Economics Working Paper Series No. 198, Asian Development Bank, 2010.
6 See Stein (2010), p. 1,320–1,321.
7 See Gao (2010), Box 1, p. 9.
8 “Affordable-Housing Delays Threaten China’s Economy,” Asian Wall Street Journal, June 11, 2011.
9 The price-to-income ratios are measured differently than the standard U.S. way, where Price-to-income-ratio = Average total price per housing unit/Average household income, as this data is not available. In the Chinese cities instead:
See Wu, Gyourko, and Deng (2010) for details.
10 A. Ahuja, L. Cheung, G. Han, N. Porter, and W. Zhang, “Are House Prices Rising Too Fast in China?” IMF Working Paper, 2010: 10–274.
11 The details of mortgages given in this section are based on Y. Deng, D. Zheng, and C. Ling, “An Early Assessment of Residential Mortgage Performance in China,” Working Paper, School of Policy, Planning and Development, University of Southern California, 2004; and A. Ahuja (2010). Y. Deng, D. Zheng, and C. Ling, “An Early Assessment of Residential Mortgage Performance in China,” Journal of Real Estate Finance and Economics 31 (2005), 117-136.
12 This section draws on L. Yin, “Is China’s Property Market in a Big Bubble?” Working Paper, China Center, Oxford University, 2010.
13 Y. Deng, R. Morck, J. Wu, and B. Yeung, “Monetary and Fiscal Stimuli, Ownership Structure, and China’s Housing Market,” Working Paper, Institute of Real Estate Studies, National University of Singapore, 2011.