Is China repeating Japan's mistakes?

The recent inflationary increase in property prices is the greatest risk that China faces today. Anecdotal evidence indicates that price increases have reached 50 percent or more in cities like Shanghai and Shenzhen.

It is difficult to assess the magnitude of the risk, since reliable data that are controlled for location and quality are hard to obtain. It is possible that property price increases are justified by fundamentals, or by "real demand" for owner-occupied housing.

However, it is more likely that the very high prices are caused by speculative investment. Demand has been created by expectation that the prices will continue to rise rapidly, so that investors can pocket profits from selling in the near future. Such speculative demand results in actual price increases, confirming expectation.