China: The Forgotten Real Estate Bubble Of The 1990s24 March, 2011, 5:01. Posted by Zarathustra
Tags: Bubble, History, Real Estate
Back in the 1990s, many Hong Kong people who have bought real estates in China ended up getting nothing but anger. What they bought were unfinished and undelivered, and those unfinished buildings could remain unfinished and deserted for years. Almost a decade after these problems started emerging, there are still people seeking refund.
Back then, real estate market was a pretty new thing for China. Before China started embracing market economy (well, sort of) in late 1970s, housing was taken care of by the State, so real estate market did not really exist in any sense. So these companies which invested in land and real estate in the 1990s were inexperienced, and the legal system was probably not well-established enough to provide enough protections for buyers. As a result, frauds happened: developers took the money from buyers (and possibly from banks as well) then walked away, leaving those buildings unfinished.
But some details are now forgotten (or they were unnoticed in the first place)…
There was a real estate bubble in the early 1990s. And why these buildings got unfinished? Because the real estate bubbles burst, leaving some developers bankrupt as they could not sell and could not get funding from banks.
There is very little wonder why people nowadays do not know that there was once a real estate bubble, or they have forgotten. After all, the real estate sector was still relatively new, and it only carried a small weight in the economy. The official (but unreliable) 70-city real estate index only goes back as far as 2005, so there is almost no way for people to see how real estate market in China went up and down since the real estate market came to life. Plus, China’s economy was not as important as now, so no one really cared.
But the fact is that there was a big real estate bubble. In a paper by Justin Lin, the World Bank’s Chief Economist, he pointed out that:
In 1992, there was a nationwide “development zone fever” and “real estate fever” in which real estate prices rose sharply and real estate speculation was widespread.
It was the period after Deng Xiaoping toured the south of China and made some speeches, urging a quicker transition into market economy and more aggressive economic development. In the next two years, the economy was overheating, with inflation hitting 27.7% (year-on-year) in 1994.
Source: National Bureau of Statistics
The Forgotten 1990s Real Estate Bubble In China
High inflation happened together with real estate bubble, mainly in coastal cities in the south of China. The scale of this forgotten real estate bubbles was huge, although it did not happen all across the countries (as it is now). The number of real estate developers in China increased from roughly 3,000 in the beginning of 1992 to more than 12,000 in just a year. Investments in real estate jumped 117% in 1992 comparing to the previous year, and housing start increased by 40.4% in 1992. By the mid-1993, the number of real estate developers reached 20,000.
Hainan province, some cities in Guangdong (notably Huizhou) and Guangxi (notably Beihai) and other cities in the coastal areas were known as the hottest places for real estate investments. As huge investments went into real estate in these areas, economic growth accelerated to unprecedented rate. GDP growth for Hainan province reached 41.5% in 1992, way ahead of the 14.2% growth for the country as a whole according to the National Bureau of Statistics. Huizhou is another city with massive speculative activities happening in this period of time. Daya Bay district, part of the Huizhou, was one of the area which attracted massive real estate investments.
To tackle the overheating economy and high inflation, the Chinese government and the People’s Bank of China (under the leader of the Governor Zhu Rongji, who then became the Premier) started the macro-economic regulation in the second half of 1993, tightening monetary policy, raising interest rates and controlling credit growth. The government also increase their scrutiny on the real estate market to stop speculations. Eventually, the real estate bubbles in various cities burst as some developers could not get funding from banks amid tightening. Bubbles finally deflated.
Large number of buildings remained unfinished as the bubble burst (together with endless legal battles). These problems emerged as the real estate market went from red-hot to ice-cold, and they were unresolved for years. For instance, Daya Bay, which is now becoming a ghost city, became a ghost city after the burst of its first real estate bubble in the 1990s. And apparently, some local governments resorted to explosives to demolishedtheseunfinishedbuildings years after these buildings were deserted (nowadays, some companies are apparently investing in these unfinished projects).
The boom of the real estate markets and their subsequent burst also contributed to the rise of non-performing loans in the banking sector. As Justin Lin pointed out:
The real estate developers and the banks, which make loans to the developers, are the ones that are most affected… the bursting of real estate markets… resulted in real estate market transactions coming to a half and in the banks having difficulties in getting loans repayments.
The burst of the real estate bubbles, however, only had a small role to play in the banking crisis as the real estate bubbles did not happen in every city in China, and the real estate sector only carried a small weight in the economy.
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