Talking Point

Realty bites

Time to panic about China’s overheating property market?

Halt: the government wants to check rapidly rising real estate prices and speculation

They start queueing early to buy their houses in Hangzhou, the capital of Zhejiang province. Many of the 1,000-strong throng had been there for the entire day, newspapers reported. Some customers had even camped out overnight, to be sure of a prime position.

Behaviour expected for tickets for the tennis finals at Wimbledon or the closing performance of a quarter-century Broadway show, perhaps.

But for a fairly nondescript apartment block? Such exuberance has the policymakers taking notice; and even they seem to agree that China is now in property-bubble territory.

First Dubai, next Tianjin?

The comparison with Dubai is an easy one in stirring fears of a real estate meltdown.

Prominent hedge fund manager James Chanos has been doing just that, with references to a problem that is “Dubai times 1,000 – or worse”.

Tianjin has inadvertently helped draw a similar comparison. A developer in the city is starting work on a vast project of luxury villas, built in clusters making up a map of the world. If that doesn’t scream desert hubris, how about the 7-star hotel and the large indoor ski slope also in the works?

Urban property prices in 70 of China’s large and medium-sized cities did go into overdrive in December, rising almost 8% from a year earlier. That’s the fastest pace in 18 months. Prices of new apartments in Beijing and Shanghai leapt by up to 60% in 2009.

The standard measure of housing affordability – the ratio of average home prices to average annual household incomes – is also hovering around 10, while most developed countries see prices at closer to 4-5 times income.

Most commentators are blaming excessive liquidity. Since November 2008, the government has pumped more than Rmb10 trillion ($1.3 trillion) into the system. As much as 20% is thought to have gone into the property sector.

The mortgage data confirms much of the suspicion. In the first three quarters of last year, Chinese banks extended nearly four times the housing loans issued in the same period in 2008, according to central bank data. Shanghai saw its own home loans shoot up 1600% over the year.

Is this a party set to last?

Back in November, Fan Gang, a member of the central bank’s monetary policy committee, openly expressed concern that real estate in cities such as Beijing, Shanghai and Shenzhen was too expensive and there was a growing risk of asset price bubbles.

Fang’s assessment has been echoed by Wang Shi, chairman of top developer Vanke, who has warned of similar risks repeatedly in recent weeks.

His great fear, he told the Wall Street Journal, is that speculation will “infect” second-tier cities and lead to conditions similar to the Japanese bubble in the late 1980s.

When it’s a developer who is sounding the alarm, perhaps it really is time to rethink…

Iceberg ahead, then?

“Once the bubble pops, our economic growth will stop,” says Yi Xianrong, an outspoken critic at the Chinese Academy of Social Sciences.

But market observers are divided over the probabilities of such a crash. While many have complained about overheating for a while, others argue that housing has remained fairly affordable.

The problem, analysts contend, is that the affordability ratio isn’t a useful metric in China. Based on 2008 data, the majority of homebuyers are largely the richest 20-30% of the urban population, says the Economist. So using ‘average’ household income is misleading. A fresh look at the average income of the top 20%, and the ratio falls closer into step with developed countries.

What’s more, about a quarter of buyers pay for their new homes fully in cash. For that group at least, affordability seems a less pressing issue.

But middle-income families are being priced-out?

Koyo Ozeki, an analyst at investment manager Pimco, thinks so.

He estimates that only 10% of residential sales in China are for the mass market. Developers prefer the fatter margins in high-end housing.

The shortage of affordable apartments for the bulk of aspiring buyers is becoming a serious social problem. Tensions appear in unlikely places, like the response to the hit TV series Dwelling Narrowness. The drama, which featured the struggle to afford apartments, was a surprise hit until broadcasting authorities pulled it off the airwaves in November (see WiC41).

Many of those who make it onto the property ladder aren’t happy about the situation either. Urban Chinese now complain about becoming “mortgage slaves,” or fang-nu, in having to put the majority of their income into home repayments.

For some single men, soaring home prices lead to other difficulties. Jin Jian, 28, told the Shanghai Daily this month that his relationships were failing because women only want men with property prospects. “I can’t afford to marry if that means I have to buy an apartment,“ Jin complains.

What is Beijing doing about it?

The issue is now getting top-level attention. Premier Wen Jiabao recently promised to rein in prices and to add more low-income housing in the cities with the highest increases. China’s central bank has also started edging up interest rates and raising the reserve requirement – the proportion of deposits that banks must set aside as reserves – to tighten liquidity.

There are further measures to discourage speculation. Where second home purchases are concerned, banks must now ensure a minimum downpayment of 40% is made. The period during which a tax is levied on the resale of apartments has been extended from two years to five.

“It [the new measures] sends a powerful signal to the market that the government wants to encourage home purchases for dwelling but is trying to contain speculative demand,” says Ha Jiming, chief economist for CICC, a Chinese investment bank.

The plan is to deflate the bubble without too big a pop. “We estimate that if policies are too harsh, to sharply reduce real estate transactions to the levels we saw at the end of last year, then China’s GDP growth could drop to as low as 6%, and that is clearly something the government does not want to see,” says Ha.

Beijing needs a lively housing market to support growth. The property sector contributes a full 10% of GDP – creating jobs, spurring private-sector investment in construction and encouraging new homebuyers to spend more on furniture and electrical goods. Land sales are an important source of income for China’s local governments too.

So what’s next?

Stand back and see the bigger picture, the optimists urge. The property market is backed by some pretty strong fundamentals. In recent years, incomes have mostly risen faster than house prices, and homeowners debt levels remain significantly lower than their Western counterparts. The country’s financial system is also relatively healthy: loans to homebuyers and property developers only account for 17% of Chinese banks’ total lending, against 56% for US banks, according to the Economist. Less leverage makes for a less dangerous situation, it says.

And (unlike Dubai) there is a substantial need for housing. The State Council expects as many as 400 million people to move to cities over the next two decades. That is a lot of pent up demand, so a lot more apartments will need to be built. If not, expect some seriously long queues outside the developers’ sales offices in future.


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