A Bubble Doomed to be Pricked Deconstructing the Chinese Real Estate Bubble

Abstract

China’s real estate housing boom has been a dreadful concern for economists worldwide. This paper analyzes the formation of the Chinese real estate housing bubble and investigates the factors that led to the bubble. Stimulated by the central government’s fiscal pressure, a redistribution of the tax revenues led to China’s local government’s “land financing” strategy, flaming the rise of housing prices. Moreover, due to the global financial crisis of 2008, the Bank of China proposed low-interest rates while the central bank increased credit availability to rejuvenate China’s economic state, which led to long-run damage. Furthermore, the expected traditional filial duty of Chinese parents to prioritize their children’s education as an investment and the obligation of owning a home for males before marriage also triggered the skyrocketing double-digit inflation rates. Finally, economists worry that the increased construction demand due to the rising urban population in the early 1970s will doom the new modern world as the population is now declining, followed by the low demand for housing in the future.