Living in China's bubble

BEIJING - China's real estate market seemed to have got into an unrelenting price spiral in 2004 as the central government issued a series of policies to cool down the sector but housing prices continued to rise throughout the year. This surprising double-digit year-on-year growth may have delighted developers, but made experts fear a market bubble.

According to the National Bureau of Statistics, by the end of November, China's housing price rose 12.5% year-on-year, up 0.8 percentage points over the 11.7% growth in October. The growth rate is even higher in 35 major cities. So is the country's real estate market enjoying healthy development or is this just an artificial bubble? There is still no definite answer.

The Chinese government has made intensive efforts in terms of land acquisition, banking loan requirements and interest rates in order to moderate these roaring prices. In line with the government's policy, all land used for property development had to be publicly auctioned after August 31, 2003. Developers were forbidden to obtain land by transfer - acquiring land in under-the-table transactions based on negotiations with local governments.

"Auctions increase the land cost to some extent, but it is a must to enhance the transparency of the real estate market and guarantee fair competition," Gu Yunchang, secretary-general of China Real Estate Association (CREA), told China Daily. From December 1, 2002, the developers' own capital was stipulated to stand at 30% of their total investment, 10 percentage points higher than before. The threshold was further increased to 35% last year.

"As the banks have tightened their controls on property development loans, developers have to find new financing channels," said Gu. Such restrictions on loans seem to have dealt a blow to some small-sized property enterprises, but open up opportunities to domestic and overseas non-banking financial institutions. "The central government took this step to promote property market consolidation and reduce commercial banks' loan risks," said Gu. But the side effects soon emerged as some funds linked to the biggest names in international finance dipped their toes into this enticing market. They include Morgan Stanley, Lehman Brothers and Rockefeller from the United States, ING from the Netherlands and Singapore-based CapitaLand, Southeast Asia's largest listed company.

Another macro-policy was issued late October, as the central bank raised for the first time in nine years its benchmark interest rate by 27 basis points, one-year lending rate from 5.31% to 5.58%, and the one-year deposit rate from 1.98% to 2.25%. The higher lending interest rate surely puts a heavier burden on developers' financing costs and the majority of the consumers who acquire their property via banking loans.

However, the impact of these measures, aiming to cool down the overheated property market, is not as so palpable as the experts and insiders had predicted, with prices continuing to rise and market demand remaining robust. The National Bureau of Statistics recently indicated that average property prices in China's main cities rose 12.5% year-on-year in 2004. Prices for residential and commercial property averaged 2,759 yuan (US$333.10) per square meter, with the average price of residential housing rising 11.6% to 2,580 yuan per square meter between January and November.

Meanwhile, the housing vacancy rate continued to slide as the vacancy rate for residential property dropped 12.9% year-on-year to 58.26 million square meters. Yi Xianrong, a professor at the Chinese Academy of Social Sciences, says that a bubble does exist, "but not nationwide ... In some specific areas such as Zhejiang, Shanghai and Beijing, the price hike is much higher than the average increase, even exceeding 20%."

The excessive growth is rather irrational, which may have been prompted by artificial speculation and will hamper the healthy and sustainable development of local markets. "China's property market is far from mature. It is so closely related to the national economy and people's livelihood that the government should take some administrative measures to lead the market on to a sound track," said Yi.

But some real estate developers believe the market is mature and the price rise is understandable and will further rise in the foreseeable future. "Limited land supplies, tightened bank lending policies and the interest rate rise during the current macro-economic adjustment results in prices roaring in the property sector," Zhang Baoquan, a leading real estate developer and deputy chairman of the Chamber of Commerce for the Housing Industry, told a high-profile property forum held in Beijing.

The ever-increasing costs of raw materials also bolster housing prices. In addition, people's concerns about reduced housing supplies and the rapid economic development in the nation are likely to boost the market demand. "Prices are determined by supply and demand, over-intervention may interfere with the functioning of these market signals, which is likely to distort the market," said Zhang.

While experts and developers quibble on whether or not China is in the midst of a housing bubble, consumers have come to accept price rises as a way of life. "Price rises are inevitable unless more measures are taken such as another, higher, interest rate rise," said software designer Hu Ming. Hu had adopted a "wait-and-see" attitude for several years, hoping the price to drop to a level he can afford. "With all the government's new policies and all the media analysis, I am really afraid the bubble may burst after I buy the house. In the meantime, the price is going higher and higher. The money I kept for the initial payment may cease to be adequate if I wait for another couple of months."

(Asia Pulse/XIC)