Superhero Bubble

The Economist has an article about the Chinese property market. The Chinese government is worried about a property bubble, understandable when you have a colossal savings rate, relatively young population and everyone who remembers the last private property crash died 20 here ago.

It’s this last point that gets me. People avoid bubbling assets because they’re worried about the sting of big capital losses. If the collective memory of the last such pain is too faint, people take it less seriously.

And the government response? Dampen demand.

The Chinese government has unveiled a series of measures since April 2010 to mute house-price inflation. They include raising the minimum downpayment for first-time buyers to 30% of a home’s value, up from 20% before, and a stop on mortgages for people buying a third or subsequent home.

Ok, but bubbles are about perception, not about actual transactions. What if people think this dampened demand is actually delayed demand?

Well, then they’ll think that all these people forced to sit out are just waiting to get back in. The bull market will last forever!

What if bubble killing policy actually just makes it stronger?!