The Real Estate Bubble: The True Cancer of Economic Development

2007/10/9 20:57:56

In economic development, hoping that no bubbles ever appear is unrealistic. Bubbles are inevitable, and economic adjustments triggered by bubble bursts are an inevitable law of economic development — this phase is inherently inescapable. But inevitable bubbles still differ in quality. The criterion for distinction is whether they ultimately affect the deep structure and operation of the real economy. Put plainly: stock market bubbles are good bubbles, while real estate market bubbles are bad bubbles. Even when stock market bubbles burst, because they don't directly act on the real economic layer, their impact is limited. But once real estate market bubbles burst, the entire banking and financial system receives the most direct hit, and the impact is catastrophic.

If a stock market bubble bursting is a bad cold, then a real estate bubble is cancer. In the history of world economic development, there are many classic examples of both types of bubbles and their post-burst impacts. The most well-known are the internet frenzy-driven stock market mega-bubble and its burst at the turn of the American century, and Japan's real estate frenzy-driven economic mega-bubble and its burst in the 1980s-90s.

There's an erroneous view that Japan's century-defining mega-bubble was caused by the stock market. In reality, what ultimately triggered its economic nosedive was the real estate bubble and the severe damage it inflicted on the entire financial system after bursting. In terms of the stock market bubble alone, Japan's episode couldn't compare to America's internet bubble. During the American one, even "market-dream-rate" valuations were invented, and the NASDAQ plummeted from over 5000 to around 1000 within months — yet the American economy wasn't greatly affected. Why? Because the real estate bubble hadn't inflated, the banking and financial system wasn't damaged, and the real economy remained healthy.

The reason America's recent subprime crisis is dangerous is precisely because it originates from real estate. Such a small disruption triggered significant tremors in the banking and financial system — this shows that real estate problems are never small problems. The amplification effect and its impact on the banking and financial system are both lethal. The reason America won't face real big trouble this time is that its real estate hasn't formed a true bubble, so for now it's a false alarm. But this should already serve as a sufficient wake-up call for all parties.

Even more destructive than a pure real estate bubble is when real estate stocks account for too large a share of the stock market, creating the real estate bubble in both virtual and real dimensions simultaneously. Real estate companies, through so-called revaluations, inflate their stock prices, then use outrageously high prices to raise capital in the market, then use that to grab land, driving up land prices and housing prices, then revalue again, starting a new vicious cycle. Nothing can create a more destructive economic bubble than this game — it is absolutely the most lethal game.

Therefore, when certain companies don the crown of "world's largest real estate company" and loudly charge toward a trillion-dollar market cap while aggressively issuing shares at inflated prices, and when certain stocks rally dozens of daily limits just because of a real estate company's asset injection — the crisis generated by this virtual-real fusion of real estate and the stock market has already reached a point that cannot be ignored. Those who manipulate stocks can keep holding the barbell up as long as their capital chain doesn't break, can't they? Those real estate developers hoarding land on a massive scale are essentially no different from stock manipulators. If they continuously replenish their blood supply from the capital markets and banking system, the real estate frenzy cannot possibly be calmed.

China's real estate industry hasn't developed too slowly — it's developed too fast. It's necessary to restrict real estate companies' listings and refinancing for a considerable period, strictly control real estate companies' credit scale, and severely crack down on land hoarding. For real estate development, the entire strategy as well as policies and resource allocation should adopt a dual-track system. Virtually every country and region in the world that has solved its real estate problems has essentially adopted a dual-track approach rather than simply throwing the real estate problem to the market.

For the vast majority of citizens, housing is absolutely not a luxury but a necessity — a right that must be guaranteed. "Housing for all" — this is the most fundamental standard by which all real estate policies should be judged. For most residents' housing needs, a fully market-oriented approach is absolutely unworkable. And since China's constitution stipulates public ownership of land, the nation's land must first ensure all citizens' most basic housing needs. Only after satisfying this need can market-oriented demand even be discussed. For the minority of citizens with stronger financial capability, they can pursue higher-standard housing consumption through market mechanisms, with prices fully determined by market supply and demand.

In short, the handling of real estate issues absolutely cannot employ a "drag-it-out" strategy. The later this problem is addressed, the greater the accumulated risks, and the fewer available means to resolve them. Once the burden becomes too heavy, it's terminal illness — incurable. China's economic hope doesn't lie in having many world-class real estate companies, but in having many enterprises that lead world technological trends with genuine independent innovation capability. As for those real estate companies with too many connections and too little technological content — perhaps there shouldn't be so many of them on the wealth rankings.