The rotten foundations of China’s real-estate market
This article discusses China’s rapidly expanding real estate market. Despite prices increasing by 30%, there is still an rising demand for new property. To meet the demands of the people, new housing the size of Singapore would need to be built every year until 2030. Most people are looking for property in the big cities, but there’s very little land available. To counteract this mismatch between supply and demand, the government is using residence permits to block construction where people want it the most. Additionally, policymakers have tightened mortgage regulations in light of the real estate bubble. These measures would make it more difficult for borrowers to qualify and receive a mortgage for the piece of property they want. Investors around the world are treading carefully, for if the property market were to crash, it would take down around 25% of China’s economy, which is the world’s second largest.
The mismatch in supply and demand are representative of matching markets. If we were to construct a bipartite graph, the nodes on the left would be the buyers and the nodes on the right would be property locations. Edges would connect buyers to the property locations they wish to buy into. In this enormous bipartite graph, we would see many constricted sets, since most people would demand property in the larger cities. To counteract this, there prices of the desired property locations would be raised in the forms of residential permits and tightened mortgage regulations. These actions serve to fix the constricted sets and dissuade some buyers from their original location choice.
http://www.economist.com/news/leaders/21708730-real-estate-elsewhere-its-economy-chinas-short-term-fixes-mask-deep-structural