Comparison of Real Estate Bubbles in China and Japan, and Prospects for the Chinese Economy

Koukichiro Mio

■Summary

1――China's Real Estate Market Continues to Decline
The slowdown in China's real estate market persists, with house prices gradually decreasing. Sales have fallen to a recent peak of about 60%. China has experienced several real estate downturns, but in terms of sales, declines, and inventories, it is far worse than in the past. And real estate growth has declined for the second year in a row. Consequently, many real estate developers are facing financial instability. The real estate slump has many similarities to the real estate bubble burst that Japan experienced in the 1990s.

2――Real Estate Bubble in Japan
The formation of the bubble in Japan began around 1987. In Japan, where a massive rate cut following the Plaza Accord triggered a boom in financial technology. And real estate developers, businesses and individuals, and even financial institutions were involved in the bubble. It collapsed around 1990. It was triggered by interest rate hikes, revisions to the tax system, and "total volume control". 　Since then, Japan has been busy cleaning up its bubble, and its government debt has continued to expand. The real growth rate in 10 has stagnated at an annual average of 1.3%.

3――Similarities and Differences Between China's Real Estate Bubble and Japan's
Similarities between Japan and China include (1) the severity of the bubble, (2) peaking demand for housing, and (3) a series of bankruptcies of real estate developers. Differences include (1) regional disparities in housing price fluctuations, (2) movements in the money supply, (3) the amount of non-performing loans held by financial institutions, and (4) other (level of GDP per capita, whether there are promising export destinations, whether there is a stock bubble, and the debt structure of real estate developers).

4――Chinese Economic Outlook
China's real estate slump will depress economic growth for some time. Although the real estate bubble has not yet burst in China's largest cities, housing inventories are piling up and demand for housing is expected to continue to decline.　 In addition, China's population problems, such as a declining birthrate and an aging population, mean that the country does not have much room for fiscal stimulus. As a result, the economic growth rate is expected to slow gradually, falling to the 2% level in 10 years, which is similar to that of advanced economies. Each time China employs fiscal stimulus measures, its outstanding government debt (as a percentage of GDP) will increase, approaching the levels seen in Japan.