Causes, Harm and Prevention of Real Estate Bubble

The carrier of the bubble may be physical assets, such as real estate, stamps, antiques, works of art and so on. It may also be virtual assets, such as bonds and stocks. This paper studies the bubble situation of real estate as physical assets.

First, the reasons for the formation of the real estate bubble

Subjectively, there are two main reasons for the real estate bubble:

First of all, there is a lot of speculation. The demand of real estate includes real demand and speculative demand. Real demand is the demand formed by residents in order to meet the needs of life and enterprises in order to meet the needs of expanding reproduction. Speculative demand is to gain profits from the difference between real estate buying and selling. Speculators buy real estate not to preserve and increase its value, but to resell it when the price is high. When the economic development is on the rise, the national investment focuses on infrastructure and housing construction. Many non-real estate enterprises and individual investors invest heavily in real estate, and real estate transactions are very hot. On the other hand, in the case of low bank interest rates, social funds lack good investment channels. Therefore, the whole society generally has good expectations for real estate prices, which will lead to a lot of real estate speculation and real estate prices will continue to rise.

The second is the credit support of commercial banks. Due to the high value of real estate, whether the real estate bubble appears is the most fundamental condition for whether there is a lot of money in the market. Therefore, financial support is a necessary condition for the formation of real estate bubble. Without the cooperation of commercial banks, there would be no real estate bubble. Similarly, for commercial banks, because real estate is real estate, the banking sector generally believes that this kind of loan is less risky. Driven by profits, banks are also very willing to issue loans with real estate as collateral. So as to strengthen the financing ability of speculators, which may further aggravate the rise of real estate prices.

Objectively speaking, there are three main reasons for the real estate bubble: adding the website of real estate appraisers to favorites.

First, the tertiary real estate market and the leasing market are underdeveloped. The primary market of real estate refers to the land market where the government holds land auctions, the secondary market refers to the newly-built commercial housing market, and the tertiary market refers to the second-hand commercial housing market. In a perfect real estate market system, especially the residential market, the tertiary market should be very active. New house transactions are only a small part of all transactions. When high-income people buy a new house, their previous house will be occupied by families at the next income level, and the house at the next income level will continue to be passed down. China's traditional concept and residents' consumption habits are to buy new houses instead of second-hand houses. At present, the third-tier real estate market in many cities has not yet started, which leads to an increase in the demand for new commercial housing.

The leasing market and the buying and selling market are interactive. If the price of commercial housing in the buying and selling market is high, some consumers will shift from the housing sales market to the rental market, and developers will face the pressure of price reduction. At present, the housing rental market in many cities in China is operating underground, with poor transparency and lack of effective supervision mechanism. If the rental market is underdeveloped, consumers will lose the opportunity to choose different housing consumption modes and have to enter the consumer market in advance when they should rent, which will bring too much demand to the commercial housing market. Large-scale rental market can not only solve the contradiction between the mobility of people and the mobility of housing property rights, but also help low-income groups avoid market risks, and it is also an important part of the housing price discovery mechanism. It can be seen that the underdevelopment of the third-tier real estate market and the rental market will lead to an increase in the demand for commercial housing, which will lead to an increase in its price.

Second, the real estate industry information is opaque. Compared with the capital market, the real estate market has the characteristics of slow information transmission and poor transparency due to its own characteristics. China's real estate market has only a history of more than ten years, and the statistical system of the real estate market is not perfect and the data accuracy is poor; The transaction information is opaque. Therefore, when consumers buy real estate, they are often confused by superficial phenomena, and some developers exaggerate publicity, which leads consumers to be too optimistic when judging that the market is divorced from reality and join the ranks of speculators.

The third is the role of the economic cycle. The supply and demand characteristics of real estate commodities determine that their prices are easily affected by the economic cycle. The supply of real estate is time-delayed. Due to the scarcity of land and the long period of real estate construction, its supply elasticity is not great. The demand for real estate mainly includes the demand for office space and commercial space caused by the development of enterprises, as well as the residential demand of residents to meet basic needs. These demands, especially the demand for office space and commercial space, can easily change in a short time with the change of economic situation. When the economic cycle is on the rise, the expansion of enterprise scale makes the demand of real estate market increase sharply, but the supply of real estate can't grow at the same time, which leads to the situation of short supply and rising real estate prices.

Second, the harm caused by the real estate bubble.

The real estate industry has the characteristics of high industrial relevance and wide influence, and has made great contributions to the national economic growth. As an important commodity related to the national economy and people's livelihood, the emergence, development and change of the real estate bubble will have a great impact on the government, enterprises and residents. Mainly manifested in the following aspects: For the macro-economy, the real estate price has an important impact on a region's economic growth and coordinated industrial development. The real estate industry is highly correlated, and industries such as steel, cement, wood, glass, plastic products and household appliances are closely related to the real estate industry. The development of real estate industry has greatly promoted the development of these industries, and the correlation ratio reaches 1: 1.7, that is, the real estate sales per 100 yuan can drive the sales of related industries to 170 yuan. When there is a real estate bubble, the real estate price rises sharply. Because GDP growth is highly dependent on the real estate industry, once the real estate price fluctuates greatly, it will not only lead to the decline of the real estate industry, but also adversely affect the stable development of the entire regional economy. At the same time, the real estate bubble economy will also affect the smooth operation of the national economy and destroy the structure and proportion of the national economy. Because the real estate bubble is driven by speculation with false high profit expectation, it is not the result of actual economic growth, and its appearance and formation make the total national economy inflated and its structure distorted. Once the bubble bursts, it will be difficult to straighten out the relationship between creditor's rights and debts in the process of bubble formation, forming a credit crisis, which will bring considerable impact and harm to the national economy.

For the financial system, the real estate industry is capital-intensive and highly dependent on finance. When there is a recession in the real estate industry, the capital chain will be tightened or even broken, which will lead to a financial crisis. After the bursting of the real estate bubble, some of the funds invested by banks in real estate are in danger of being irrecoverable, and many loans eventually become bad debts, greatly increasing the proportion of non-performing loans of banks. The rising proportion of non-performing loans in banks will force banks to shrink the scale of loans, tighten the credit environment of the whole society, and have a tightening impact on the normal production of other industries. If the bubble is serious, the price will drop sharply after bursting, and the bank will lose too much, which may damage the bank's reputation. Depositors will doubt the bank's credit and run on the bank, causing financial panic and even bankruptcy of financial institutions.

For enterprises, the sharp rise in real estate prices will lead to the increase in production costs of most enterprises, making the operating conditions of enterprises erratic, thus making enterprises reduce expenses, reduce production scale and lead to a large increase in unemployment. After the bubble burst, real estate prices fell sharply, many real estate enterprises and real estate-related enterprises went bankrupt, and many projects under construction were suspended and postponed, which led to the depression of the construction industry. Due to falling prices, people's enthusiasm for real estate investment has rapidly declined, and the real estate market may be in a long-term downturn. Industries that provide raw materials for the real estate industry, such as steel and cement, will have serious overcapacity, and investment in these industries will be difficult to start for a long time.

For residents, because food, clothing, housing and transportation are the basic needs of people and the necessary conditions for living and working in peace and contentment, the rise in real estate prices will also increase the cost of living, including housing, and cause other consumption to decrease. Especially in today's well-off society, the emergence of real estate bubble will adversely affect residents' lives and hinder the realization of national policy objectives.

If the real estate bubble bursts, the real estate price will drop sharply from its peak level, which will lead to the loan value far higher than the market value of its collateral, thus leading to a large number of loan defaults.

Third, prevent the real estate bubble.

The real estate bubble will pose a great threat to the whole economic system and financial system, and will bring many problems to the normal operation of the whole society. Preventing the emergence and expansion of the real estate bubble requires the participation and efforts of government functional departments and commercial banks.

From the perspective of government functional departments, the government should formulate relevant tax policies and real estate policies and strictly implement them, increase the cost of speculators holding real estate and transaction costs, and reduce speculation in the real estate market. Accelerate and standardize the development of the tertiary real estate market, and continue to guide the tertiary real estate market to develop in a good direction. At the same time, it is necessary to standardize the real estate leasing market and create conditions for the development of the real estate leasing market. In this way, some demanders in the real estate market turned to the tertiary market and the leasing market, which can reduce the demand in the real estate market and effectively curb the real estate bubble.

From the perspective of commercial banks, banks should strictly examine and approve loans to the real estate industry, and strictly control transactions from land transactions, real estate development to new commercial housing. Through the control of credit funds, unqualified developers will be gradually eliminated from the real estate market, and speculators in the market can also be reduced.

[References]

Fan, Xu, Yang Danming. China real estate dictionary [M]. Beijing: China Building Industry Press, 2003.

[2] wang pu. Real estate management consulting practice [M]. Beijing: CITIC Publishing House, 2005, (1).

[3] John. Okay, Murray. Peter Milgate. Newman. New Bergrif. Dictionary of Economics: Volume I [M]. Beijing: Economic Science Press, 1992 [4] Zhang Haiyan. Case analysis of bubble economy [J]. Special Economic Zone, 2004, (1).

[5] Liu Hongyu, Zheng Siqi and Shen Yue. Analysis of "Bubble" and "Overheating" of China Real Estate Market [J]. Construction Economy, 2003, (2).