Unexpectedly Intriguing!
August 5, 2010
Matt Yglesias writes regarding the Chinese government's direction for banking regulators to consider the impact of a 60% reduction in Chinese home prices as part of a stress test (HT: Tyler Cowen):

Insofar as prices soared 68 period in one year, 60 percent decline doesn't sound like much of a worst-case scenario.

Let's put that in context, shall we?

Year 0: Let's say our Chinese home value is 10,000 Yuan.

Year 1: It rises in value by 68% to 16,800 Yuan.

Year 2: It crashes in value by 60%, falling to 6,720 Yuan.

To rise back to the level of 16,800 Yuan, our hypothetical home in China must increase in value by 150%. Which coincidentally, would be what it would take to make the bank's balance sheets balance out and be solvent for the loan it might have underwritten on the property.

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