It is difficult to envision an economy which is the fastest growing consumer market, to be a victim of unsold homes and, paradoxically, rising home prices.The most dramatic rise in has been witnessed in housing prices in 70 Chinese cities, in the past year. Average prices rose by 7.3 percent in June 2016, year-on-year. This trend of increasing prices marked its arrival from December 2010 (house price data being available from this particular time period). An increase of 17 percent until the second quarter of 2015 (see graph), and of about 23 percent until recently, in select large cities in China. Price of houses in major cities of China have increased in the range of 19 to 48 percent.The price rise is reflected in the number of loans that increased in value by 24 percent, year-on-year, this June. Nevertheless, so have outstanding loans; both real estate development loans and individual loans rose in value.
The last two years of monetary easing policies by the Peoples Bank of China has been a significant reason for such volatile, if not increasing house prices. Increase in money supply, created by decrease in interest rates, or in other words, monetary easing has resulted in this upsurge of house prices. Less expensive mortgages and loans have given builders and developers more confidence in their prices. Surprisingly, increase in purchasing power lead to higher increase in house prices, defying behavioural economic notions in a certain way. Some more reasons for surging prices may be the ever-increasing number of young IT employees, higher rates of urbanisation, and increased FDI to tech start-ups and businesses. More importantly, the recent slowdown in the economy, since 2013, made some States relax their purchase restrictions on housing. This has also lead to a medium to high increase in house prices.
The revision of policies on mortgages, once in 2007 and another time in 2008 and again in 2010, in order to revive the housing market, was perhaps one reason for the prompt increase in house prices, in the medium term. What may have been too much intervention by the government, will perhaps provide a stance that the housing market is too important a part of the economy, to fail; and that the government will duly play its part in accommodating both the consumer and the supplier. An attempt to establish a link between monetary policy and the macro prudential policy is being made earnestly by the Chinese government. It has been recognised that interest rate cannot be the sole instrument in policy implementation. The use of macroprudential instruments, especially towards the housing market, has been quite extensive since 2006. The tools have helped in leveraging house prices, credit, mortgages and therefore purchasing power of consumers. A subprime crisis in China seems far-fetched, currently.