In economics, a so-called bubble is any deviation of an asset’s market price from its intrinsic value. Such deviations can be driven by a range of irrationally exuberant and speculative behavior: overly confident views of the future, a herd mentality, or a misplaced faith in an investor.
Whether the Chinese property market represents a bubble of epic proportions hinges upon the nature of the demand. Do the country’s sky-high property prices reflect genuine, realistic views on the future consumption of housing services? Or are they speculative purchases driven solely by the overconfident expectation that house prices can go nowhere but up?
So far, our research indicates that consumption driven purchase in major markets (T-1 and 2 cities) is robust, driven by wage inflation and urbanization. Even if China’s growth rate were to fall below 7%, the fundamental demand for property will remain strong. It’s hard to see a scenario where the price of property stop rising in the medium and long term.
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