The Chinese housing market has been growing at a neck-breaking pace prompting many to wonder if this is a bubble or a simple example or demand driven growth. The demand that has been experienced during the rise in prices has been growing but not in the way that the Chinese government would like to see. As house prices have increased, the demand of the middle income consumer looking to buy a home as a residence has been slowly pushed out of the market by rising prices, decreasing the non-speculative demand. The demand for houses has then shifted to wealthy individuals and businesses that are looking for places to invest and diversify, increasing the speculative demand. While the increase in speculative demand has outpaced the decrease in the non speculative demand it has created a type of demand that will not be as inelastic to changes in house prices.
Another factor is that the housing market is one of only two real assets that mainland Chinese can invest in, the other being long the stock market. With the government announcing that it intends to open the market to shorting and indexed futures, there will be more opportunities for the Chinese investor to profit from. The government has also stated that it will try to stem the rising prices of the housing market by forcing the home builders to focus more on the middle income market and to free up the speculative land that many have been holding. The government also wants to make it less profitable to buy homes in speculation by making higher requirements for a second home purchase and the quick sale of homes.
These factors could create the catalyst needed to pull home prices down in China. Issues could arise when there is pressure from the government to provide more supply to the middle income homebuyer as the same time that the higher income homes are trying to find a discount that will make them more attractive. Without the demand of other speculators into the real estate market, perhaps because their capital is tied up shorting the homebuilders, prices could drop quickly. The simultaneous increase in asset classes as well as the lower return potential of the real estate sector could result in the beginning of the end of rising real estate prices.