Practise evaluating how housing and share price bubbles affect affordability, wealth, confidence and policy choices across the economy.
Between 2000 and 2019 in China the average price of a house increased from 4000 yuan per square metre (m^2) to 60000 yuan per m^2. The ratio of average house prices to average incomes increased from 5.6 to 7.6, showing that houses were becoming less affordable.
Evaluate the impact of market bubbles in the housing market.
A housing-market bubble is a sustained rise in prices above long-run sustainable or fundamental value, often driven by expectations of further increases. In China, the average price rose from 4,000 to 60,000 yuan per m² and the price-to-income ratio rose from 5.6 to 7.6, reducing affordability for low- and middle-income households. Rising prices may increase wealth and confidence, support construction, bank lending and consumption, but renters do not gain the same wealth. If the bubble bursts after interest rates rise, credit tightens or confidence falls, house prices, consumption, construction and employment may fall, harming lenders and the wider economy. The judgement depends on whether the increase reflects genuine growth and higher incomes or speculation, whether prices are nominal or real, the size of home ownership and the time horizon.