One of America's most distinguished economists says that China is at significant risk of suffering from a precipitous crash in its domestic housing market the way the US did during the sub-prime meltdown.
Robert Shiller, a professor of economics at Yale University as well as Nobel laureate in economics, has been enlisted by China’s top policy-makers to provide advice on dealing with the country’s overheating housing market.
While visiting China to meet with the National Development and Reform Commission – one of the country’s leading policy bodies, Shiller told state media there was still some the possibility China could suffer a property market meltdown akin to the US subprime mortgage crisis of six years ago.
According to Shiller capital controls serve to prop up China’s domestic real estate markets by restricting investment opportunities for citizens, and their withdrawal as the country liberalises its finance system could lead to trouble ahead.
“I am thinking that Chinese investors don’t have as many opportunities to spread around the world as the Americans do,” said Shiller to the Chinese press. So there is a captive audience for real estate investment and that support will be removed as China’s capital flows are liberalised.”
Shiller further points out that because of its very nature as a rapid-growth emerging economy, China is at extremely high risk of developing an overheating housing market.
“China ought to be the most vulnerable to real estate bubbles, because the transition is so enormously fast.”
Concerns over a potential property crash in China were recently heightened by the decision of Li Ka-shing, the Hong Kong tycoon who is currently Asia’s wealthiest individual, to dial down his mainland-based real estate investments to the tune of 20 billion yuan.
Declines in housing prices in China’s 3rd and 4th tier cities have also exacerbated worries about future weakness in the property market.
The Chinese government has at least been prudent enough to seek counsel from one of the most qualified experts on asset markets. Shiller was jointly awarded the Nobel Prize in Economics with Eugene Fama and Lars Hansen for their research into the analysis of asset prices, and was one of few observers with the prescience to discern two of the biggest stock market crashes in recent US history in advance – the 2000 tech crunch and the 2008 subprime housing crash.