To fully understand why China's housing market has ballooned into a new and increasingly risky bubble, we have to understand that it's not just government policies that have created a runaway speculative market; other financial and cultural issues are also at work.
Patrick Chovanec, an associate professor at Tsinghua University's School of Economics and Management in Beijing, China, recently described a number of these key issues. (I can confirm these from first-hand experience in China, and from our friends who have owned condos in China for many years and live there part-time.) The key issues include:
1. There are no property taxes in China, so the costs of carrying speculative (empty) homes is very low in comparison to the U.S.
2. Property values have, with brief interruptions, risen for decades, so the average Chinese household considers real estate a much safer bet against inflation than the stock market.
3. Until recently, households had few investment alternatives to a simple low-yield savings account. The incredible boom and bust in the Chinese stock market in 2006-08 -- akin to the dot-com mania in NASDAQ stocks in 1998-2000 in the U.S. -- left many Chinese investors wary of the stock market. As a result, many view owning investment properties as akin to "money in a savings account," that is, a low-risk, long-term investment.
4. Though the central government is trying to suppress speculation, it is aiming at the wrong target. Flipping property is simply not common in China; the overall number of sales of existing homes is very low by U.S. standards. The speculation arises from the easing of lending by the central government and local government dependency on real estate development for revenues and economic growth. As a result, the planned tax on private re-sale transactions will do little to lower speculation.