Economic growth stems from, and brings forth further commercial activities. The aggregation of commercial activities influences the rate in which economic growth thrives, hence the importance of noting each kind of activity. Among the most obvious manifestations of a growing economy is the emergence of advanced infrastructures. Positive progress in the economy usually reveals itself through the presence of infrastructural improvements on roads, transportation and real estate spanning commercial, business and residential facilities.
The evolution of real estate infrastructure serves as among the most compelling signs of economic growth. One could find an additional building in an urban skyline as a mark of advancement in one area, especially those that feature avant-garde architecture and groundbreaking technological features. Yet, what is more compelling is the fact that the construction of several kinds of real estate infrastructure has started to boom in many nations, only to decline worldwide due to the economic recession of 2008. Thus, this study purports to strengthen the premise that construction booms in the real estate market generate adverse economic effects due to sheer disregard to demand and credit sustainability. Emphasis on the cases of East and Southeast Asian nations provides the primary focus in the literature instrumental for the findings of study, with the issue on the Asian Financial Crisis of 1997 being a core point of reference.
Notable Cases Within East and Southeast Asia
Insights on the effects of growing investment activities on the prices of real estate properties have become a key characteristic on the literature of the economic effects of real estate construction booms. Since there is rapid growth in real estate activities in many parts of the world, it is inevitable that foreign investors would find themselves involved in such process. Promising great financial returns, the experiences of nations in East and Southeast Asia involving real estate construction booms has encouraged foreign real estate investment (FREI) activities to arise. Gholipour (2013) saw that that as the center of his hypothesis using data gathered from 21 economies between 2000 and 2008, many of which are emerging ones in Europe, East and Southeast Asia. Results consistently show across the nations that higher FREI leads to increased house prices. Such is because the upsurge of national interest on housing within economies entails appreciated values justified by meeting international standards that make both local real estate investments more competitive alongside foreign presence. The fact that the real estate markets in emerging countries have become more lucrative with foreign investment necessitates greater need for revenue generation that meets expected return figures. Greater productivity entails both the addition of benefits and costs that balance the process, with the addition of innovative features being a key factor for housing price increases such as proximity to commercial areas and high quality of housing, among many others. The fact of increased international presence through investments in housing brings forth the need to meet costly demands and produce favorable returns through the rise of housing prices. Thus, overproduction in the real estate market could lead to a bubble characterized by low demand and high costs. What stands as a compelling problem with emerging economies experiencing construction booms in real estate is the saturation of investments, notwithstanding the fact of limited demand due to premature growth in living standards that have yet to rise through factors that would supplement the factor of economic improvement involved (Gholipour. 2013).
The Peoples’ Republic of China (PRC) is among the nations that have emerged as the strongest leaders in the global real estate market. The evident escalation of the domestic real estate market in the PRC is symbolized by rapid changes in urban skylines and widening of urban sprawls in period ranging from five to 10 years – a feat unmatched in conventional global standards. Hua, Sun and Borgia (2012) noted that the residential real estate values in the PRC have risen due to such trend, albeit with the involvement of several other key factors. Per capita GDP growth attests to the rising living standards of people living within PRC, especially in its key urban regions. The emergence of key urban conveniences in the form of more convenient access to transportation, commerce and industry has led to the rise of standards people get in return from their income. Increase in wages and population entailed the rise of prices in residential real estate, especially with the emergence of particular innovations that cater to the multifaceted tastes of the growing market. Since more people in the PRC could now afford higher prices on residential real estate in relation to their demands, housing prices have naturally risen due to costs resulting from such innovations. Land costs within key urban areas in the PRC also rose due to the value afforded by surroundings that generate high economic productivity and investments, both domestic and international. While the foregoing seems like a promising proposition to the economic rise of the PRC, it is nevertheless indicative of another problem in the nation brought forth by overproduction of demand. The case of the city of Ordos located in desert-run Inner Mongolia, for example, shows that while construction booms in residential real estate could grow so immense in a nation to the extent that areas that have no prior development would immediately experience expansive construction activities, lack of substantial demand could cause the growth of bubble. As the bubble grows bigger through overproduction, it could burst and cause write-offs in housing prices and loss of money from investments. Such could cause a potentially destructive economic disaster on the PRC, with many real estate projects losing profitability entailing nonpayment of loans taken for construction and written-off values of residential units. Uncontrolled rate of residential real estate production could therefore harm economies undergoing trends associated with construction booms (Hua, Sun and Borgia, 2012).
While increase in real estate prices in many emerging economies in East and Southeast Asia, its effect on stock indexes have grown weaker over time. Hui and Ng (2012) noted that Hong Kong, a special administrative region (SAR) within the PRC, has exhibited rising prices in real estate production due to the evident changes its skyline has experienced. Higher real estate values have prevailed due to the presence of foreign investments and robust commercial activities attributing to constant real estate developments. What began to diverge from such fact, however, is the direct influence on stock market figures. Factors attributable to the growth of the economy of the PRC as a whole especially after the 1997 territorial turnover of Hong Kong and trends against inflation brought by the Asian Financial Crisis of 1997 has lessened the influence of real estate market prices on stock market prices. Therefore, investors wishing to rely on the strong showing of Hong Kong on the real estate market might not benefit directly through the stock market. In investing on the stock market, investors have been encouraged to consider other forms of investments than real estate if they wish to gain guaranteed benefits through stronger connections with other investment portfolios. In this case, the possibility that any crisis resulting from real estate might not affect investments on the stock market, except for those whose investments lie directly within the real estate sector (Hui and Ng, 2012).
The difference between the prevalence of freehold and leasehold properties have also affected the growth of residential real estate bubbles. Teng, Chang and Chau (2013) noted the difference of the cities of Taipei in Taiwan and Hong Kong in the PRC. Both cities have experienced massive changes in their real estate development over the past 30 years, as they owe those developments from heavy investments coming from domestic and international sources and the emergence of profitable and innovation-based industries that sparked greater commercial activities within their jurisdictions. Taipei has freehold land tenure while Hong Kong has a leasehold one. The main difference between the two diverging types of land tenure is the fact that the former attributes to one owner that could develop the land as he pleases; the latter involves developers leasing lands for a certain period until the owner acquires the land again after the lease deadline, enabling him to look for other leasing developers. Findings in the study reveal that Taipei has generated larger sizes in housing bubbles owing to its freehold land tenure, while Hong Kong has amassed a relatively smaller one due to its leasehold land tenure. The fact that demand replenishes towards land properties due to lease changes makes Hong Kong less vulnerable to real estate bubbles. Taipei, on the other hand, has greater risks to deal with in terms of enlarging housing bubbles due to tendencies of inactivity resulting to lack of profitability of freehold land developed by owners. Empirical evidence supporting such premise is evident from the switch of Hong Kong to semi-freehold land tenure due to automatic lease renewals has caused the city to experience larger housing bubbles. Such provides a strong insight on the effects of the construction boom in light of possible economic disasters brought by bubble bursts. Real estate bubble bursts, after all, comes from the lack of demand for costly real estate projects. It is important for real estate construction-driven economies to take note of such fact, since meeting requirements for profitable demand remains as among the strongest deterrent against any economic crisis resulting from construction booms in real estate, particularly for residential facilities (Teng, Chang and Chau, 2013).
The experience of Japan during its economic decline throughout the 1990s comes from the fact that its real estate markets have failed to generate substantial demand. White (2012) noted that a combination of unsustainable real estate policies that led to the exorbitant rise of housing prices in Japan has led the nation into economic turmoil – one that many economic analysts would call the “Lost Decade”. The extraordinary growth Japan has experienced between the 1950s and the late 1980s have resulted to a dramatic increase of housing prices. Such increase has found basis on convenience – one that the Japanese value greatly in terms of looking for suitable houses. Proximity to locations such as shopping centers, schools, offices and the like have placed great value on housing prices, leading many Japanese real estate companies and housing bodies to fail in terms of generating the necessary sustainable demand. Lack of activity in the housing rentals market has provided another cause of hardship for the Japanese real estate, entailing many people to purchase houses despite the expensive costs involved. When the effects of the real estate bubble became all too prominent at the start of the 1990s, the economy of Japan plummeted to its lowest levels since its postwar economic growth. That led to consequences ranging from declining commercial activities to loss of income and homes of many Japanese people due to the prevalence of employment layoffs and closure of businesses. The Japanese government sought to remedy the problem by advocating the decrease of real estate prices, having gone down steadily within rates of 50 to 70% towards the start of the 20th century. Such case is an important insight on the economic effects of the construction boom in residential real estate, emphasizing on the importance of meeting demand for sustainability of profit and economic stability, among many other possible indicators (White, 2012).
Woodsworth (2012) has paid closer attention to the case of the city of Ordos in Inner Mongolia, PRC. Ordos, which is far from sea and in the middle of the desert, experienced prosperity through the emergence of its coal mining industry. The economic reforms that spread through the PRC beginning from the 1980s have made Ordos an interesting case for development by the government. Emphasizing on the importance of growing urbanism as a sign of economic growth, the government sought to develop Ordos into a massive city that would target the enormous population of its large cities to transfer into its lucrative housing developments. Yet, since Ordos is far from being commercially potent such as the likes of Beijing, Shanghai and Chongqing, it started to appear as a dent into the prospects of the PRC to trigger sustainable urbanism. The development of large residential areas did not translate to a transfer of the population from larger cities due to the lack of facilities in the area and the emphasis of the Chinese on investing on real estate, which failed due to the lack of demand resulting from the absence of people transferring within the city. Thus, Ordos has initially appeared as an epitome of the unsustainability of the “city out of nothing” approach, noting that the development of cities would not surge without the existence of wide variations of economic activities. Such further attests that construction booms in real estate would be bound to failure if it does not meet its much-needed demand (Woodsworth, 2012).
The decline in any economic activity of East and Southeast Asian nations that has experienced construction booms in real estate, particularly on residential units, has sparked controversy concerning the importance of meeting demand in a highly sustainable manner. Verily, the following factors have emerged in relation to demand – high real estate prices and the absence of commercial activities resulting to the failure of real estate units becoming unprofitable due to lack of demand. High real estate prices skew demand because not many people could afford real estate products that have exorbitant costs. Failure to improve living standards in relation to income disables people from having access to highly priced real estate properties. With high prices, real estate properties become distant from the reaches of the very factors it tries to reach out – people who would buy houses. In that regard, it is essential to regulate the rise of real estate prices through the presence of rental markets as in the case of Japan and greater regard for increasing living standards to justify the high real estate prices.
Lack of commercial activities tends to degrade the state of construction booms in real estate as well. Limiting land ownership prospects to just one owner and not expanding it to leaseholders would limit prospects for development as empirically proven in the cases of Taipei and Hong Kong, causing decline in demand generation. The “city out of nothing” development of the city of Ordos accounts for its failure to generate demands from people coming from larger cities within the PRC, as lack of commercial and civic facilities and its sheer distance from established urban areas have discouraged people to move into the vast residential facilities.
Gholipour, H. (2013). The effect of foreign real estate investments on house prices: evidence from emerging economies. International Journal of Strategic Property Management, 17(1), 32-43.
Hua, X., Sun, L., and Borgia, D. (2012). The influence of fundamental factors on Chinese residential real estate prices: a unique data panel study (Working Paper No. E44 G12 R21 R31). Retrieved from Social Science Research Network website: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2022682
Hui, E., and Ng, I. (2012). Wealth effect, credit price effect, and the inter-relationships between Hong Kong's property market and stock market. Property Management, 30(3), 255-273.
Teng, H., Chang, C., and Chau, K. (2013). Housing bubbles: A tale of two cities. Habitat International, 39, 8-15.
White, B. (2012). Real estate in Asia – policy, pride & prejudice: Preventing strategic default: Lessons from Japan. Cross-Currents: East Asian History and Culture Review, 29.
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