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

2024年03月11日

（三尾 幸吉郎）

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3――Similarities and Differences Between China's Real Estate Bubble and Japan's

1| Degree of Bubble
During Japan's bubble period, as mentioned earlier, housing prices in the Tokyo metropolitan area surged inexplicably, becoming unaffordable for the average person. How does China compare?

To assess this, we calculated the annual income multiple in Shanghai. The average annual wage in Shanghai, as reported by the National Bureau of Statistics, was 191,844 yuan in 2021. With an average of 1.45 workers per household in 2012, the combined annual wage is estimated at 278,174 yuan. In contrast, the housing price in Shanghai stands at 40,974 yuan per square meter, with an average housing area per capita (urban area) of 39.8 square meters in 2021 and an average of 2.84 persons per household in 2012, resulting in an estimated combined housing price per household of 4,631,404 yuan. Based on these estimates, the annual income multiple is calculated at 16.6 times (Chart 11). This is nearly identical to the 15.8 times seen in 1989 for the Tokyo metropolitan area, indicating an inexplicable rise in housing prices in Shanghai. Internationally, a ratio of 4 to 6 times the annual income is considered reasonable.
A similar calculation for areas outside of Shanghai City (Chart 12) reveals that Xizang Autonomous Region, Guizhou Province, and Xinjiang Uygur Autonomous Region fall within the reasonable range (4 to 6 times). However, Beijing is more expensive at 18.8 times, exceeding Shanghai City, with a national average slightly higher at 7.6 times. While China exhibits significant regional disparities due to its vast land area, housing prices in major cities like Beijing and Shanghai are notably higher, indicating an extremely high degree of bubble.
2| Housing Demand Trends
As Japan's bubble economy began to deflate, the declining birthrate and aging population led to a peak and subsequent decline in the population of major homebuyers (aged 25-49)  around 1980 (Chart 13). How does China fare in comparison?

In China, the birthrate is declining, and the population is aging, causing the population of major homebuyers to decline after peaking around 2012. Analysis of China's population pyramid (Chart 14) shows a historically low number of individuals under 24, who are future homebuyers. Consequently, any potential future surge in housing purchases is unlikely to be sustained, with a downward trend expected.

Conversely, urbanization, the migration of people from rural to urban areas, continues in China. The urbanization rate in China stands at 66.2% (2023), lower than Japan's in 1990, which was around 77%. However, as noted earlier, the population under 24 is small, suggesting a slowdown in the pace of urbanization. It is also worth noting that while housing demand in major cities will rise as people migrate from rural to urban areas, it will decline in rural areas.
3| Housing Price Volatility
Before and after the bursting of Japan's bubble, both the rate of increase to the peak and the rate of decline thereafter were greater in large cities such as Tokyo, Osaka, and Nagoya than in regional cities. In the case of Tokyo (Chart 15), although housing prices in 23wards area were initially somewhat expensive, they rose rapidly following the formation of the bubble after 1987, and then declined sharply following its burst. The Tama area, which is Tokyo suburbam area, exhibited a similar trend, but with a smaller fluctuation rate compared to urban areas.
What is the situation in China today? Since new housing prices are heavily influenced by government controls, we will examine the price movements of used housing. Looking at this (Chart 16), the city with the highest rate of increase up to the peak was Shenzhen City(Guangdong Province), where prices nearly tripled since December 2010. In major cities like Beijing and Shanghai, prices doubled across the board. Although prices in Shenzhen City peaked in April 2021 and have since declined, the rate of decline remains at 8.9%, which is not sufficient to cause a bubble to burst.

Conversely, Mudanjiang City (Heilongjiang Province) experienced the largest drop from its peak, falling 36.6% since reaching its peak in April 2011. Looking at the trend of existing house prices, Mudanjiang City saw a 15% decline due to the China shock from 2014 to 2015 (Chart 17). Subsequently, while Mudanjiang City somewhat recovered due to the beginning of the bubble formation across China, it never returned to pre-China shock levels and began declining again in June 2019. In the four and a half years since then, Mudanjiang City has seen a 30% decline, and the bubble has burst. Incidentally, the annual income ratio in Heilongjiang Province, where Mudanjiang City is located, has fallen to 6 times, which is within a reasonable level (Chart 12).

In Japan, a bubble formed over several years before collapsing within a few years. In China, while the bubble has burst in some regional cities, the rate of decline in major cities (Beijing, Shanghai, Guangdong Province) is small, and the degree of the bubble is still high, with the annual income ratio exceeding 10 times (Chart 11). If the bubble were to burst in China's major cities, it would likely be in the future, not now.
4| Finance
After the bursting of the bubble economy, not only real estate developers but also ordinary companies and individuals in Japan began selling their properties simultaneously, leading to the sudden manifestation of the effects of previous monetary tightening measures (Chart 7). Consequently, the growth of the money supply sharply decelerated (Chart 18), economic activity stagnated, and non-performing loans held by financial institutions surged (Chart 8), causing financial system instability.

What is the current situation in China? Although there has been considerable selling by real estate developers and individuals who purchased real estate for speculative purposes, the money supply has remained at around 10% compared to the previous year (Chart 18), and the amount of non-performing loans held by financial institutions has increased but remains at around 3% of GDP (Chart 19). This is partly because prices in major cities have only slightly declined due to government control, and the bubble has not burst.

If bubbles do not burst in major cities, China may avoid the financial system instability experienced by Japan. However, there is no evidence to conclude that bubbles will not burst in major cities. While it is true that Chinese commercial banks do not have a large number of non-performing loans, with the ratio of non-performing loans to total loans only around 1%, and the ratio of non-performing loans to GDP at just over 3%, indicating healthier bank management compared to Japan after the bubble burst. However, Chinese banks have been disposing of non-performing loans worth about 3 trillion yuan for three consecutive years since 2020. The question then arises: where did the non-performing loans that were removed from banks' balance sheets go? Although their whereabouts are unknown, it cannot be ruled out that they were transferred to Asset Management Companies (AMCs). At present, this is not a major concern because the bubble has not burst in major cities, but if it does, the financial condition of AMCs is something to watch out for. There is a not insignificant risk that China could fall into financial instability.
5| Other Notable Points
Additionally, when comparing the bursting of the bubble in Japan with that in China, the following four points should be kept in mind.

Firstly, the level of GDP per capita: at the peak of the real estate bubble in 1991, Japan's GDP per capita was $29,512, higher than that of the United States ($24,303) (Chart 20). At that time, Japan was also in the midst of a trade dispute with the United States. Therefore, even if the real estate bubble burst and domestic demand was damaged, the hurdle for Japan to return to dependence on external demand was very high. In contrast, China is currently in the midst of the U.S.-China conflict, but its GDP per capita is only $12,814, or 1/6 of the U.S. GDP ($76,348). Therefore, the potential for international competitiveness of Chinese products is higher than that of Japan at that time.

Secondly, the existence of promising export destinations: at that time, Japan had an extremely promising export destination called "China," which was certain to develop in the future. In fact, Japan expanded its exports to China after the bubble burst (Chart 21). On the other hand, there are countries and regions in that are certain to develop in the future, such as India, ASEAN, and Africa. In fact, China is working hard to incorporate the Belt and Road Initiative. However, due to border disputes between India and China, it is unlikely that China will be able to expand its exports as much as Japan expected at that time.
Thirdly, the stock bubble: when the real estate bubble burst in Japan, the stock bubble burst almost simultaneously, exacerbating the economic impact (Chart 22). In contrast, the current stock market in China has been sluggish due to the slump in business performance caused by the real estate recession. However, with a price-earnings ratio (PER) of 12 times and a price-to-book ratio (PBR) of 1.2 times, indicating a low degree of bubble (Chart 23). Although the stock market may fall due to further downturns in business performance, it is not a bubble in the first place, so it is not expected to collapse. In this regard, the impact on the economy is expected to be smaller than that of Japan at that time.

Fourthly, the debt structure of developers: while real estate developers in Japan often invest in real estate with their own funds and loans, in China they often build on advances received from buyers. For example, in the case of Country Garden(碧桂園), properties under development account for half of its assets, while advances account for 44% of its liabilities. It is also necessary to pay attention to the influence of business practices that differ from those in Japan.

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三尾 幸吉郎（）

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