CHINA UPDATE: House Price Bubble Still Swirling

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CHINA UPDATE: House Price Bubble Still Swirling

Posted by Alex Finkelstein 04/08/10 11:42 AM EST
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China Daily, an English-language newspaper owned by the Communist Party of China and based in Beijing, reports continued Internet controversy this week about the country's runaway housing property market.

The gloom-and-doom crowd predicts the market will collapse in 2011.
The bullish crowd forecasts the government will keep the bubble from bursting.

Coming at a time when complaints about mounting housing prices are on the rise, the online debate has drawn enormous attention from ordinary residents, industry insiders, experts and received substantive media coverage, the newspaper reports.

Speculation started after a comparison was made between China's property market and that of Japan In 1991, Japan's property bubble burst.

Following the Japanese yen's appreciation in 1985, large amounts of capital flowed into the country's real estate, inflating prices artificially which eventually led to a burst.

"Two decades later, some say the same is happening in China, both in sequence and pace: the yuan appreciated in 2005, capital flowed to property markets in 2006, resulting in soaring housing prices in 2007, and now the burst is imminent," China Daily reports.

For people who are struggling to buy an apartment in cities, a big market correction will make their dream come true. However, for those who have bought apartments at high prices in recent years and for those who invest for profit, a crash would destroy their dream, China Daily reports.

"The anticipation of a market collapse shows that people are getting more discontent and impatient as property prices go through the roof and government measures failed to control the prices rise," says Qin Rui, a senior analyst with the Beijing-based 5i5j Real Estate Service.

February home prices in 70 major cities in China climbed 10.7 percent from a year earlier, the fastest pace in almost two years, the National Bureau of Statistics reported. The rapid growth has ignited fears of an asset price bubble and prompted complaints.

Since the end of last year, the government has put in place a series of measures to curb speculative purchasing in an attempt to stabilize prices, including a harsher property sales tax, increased supply of affordable houses, restraining land purchases, and controlling bank credit.

Qin says the influential policies and seasonal factors in the first two months helped stabilize sales and prices for a while at the beginning of this year.

However, people had still expected more effective measures to be unveiled from the annual session of the National People's Congress, China's parliament, in March, he said.

Since the parliamentary session, however, sales and prices have resumed the fast rate of growth in major cities.

In Beijing, previously owned home prices stood at 14,650 yuan per square meter at the end of March, 8.8 percent higher than that at the end of the previous month.

Second hand home sales were expected to hit 27,000 in March in Beijing, the second largest only after December last year, according to the Centaline Property Agency. March 30 saw sales of 2,273 second hand homes, the record daily high in history.

Experts say that China is unlikely to repeat Japan's asset bubble crash since China currently is at a different development stage than Japan was in the 1980s, according to China Daily.

The biggest difference was that China was still at a low stage of development and had a large potential for urbanization and property development, says Hao Daming, economist with the China Galaxy Securities.

The urbanization rate in Japan stood at 75 percent in the 1980s, while China would see its rate around 50 percent in 2015, he says.

The massive inflow of rural residents into cities would push up real demand for homes, different from Japan's market in 1980s which was fueled more by speculation after the yen's appreciation, Hao says.

The Bank of Japan said in a report this week that China's current asset price gains were mainly driven by increasing real demand, with more of its population moving to urban areas.

This was different from Japan's asset price bubble in the late 1980s, which was driven by speculation, the report said.

Cheng Enfu, a senior scholar at the Chinese Academy of Social Sciences, a government think tank, says another difference was that policies made by the Chinese government tended to be more timely and forceful than Japan's policies because policy-making in Japan was more affected by different interest groups.

He believes the Chinese government would be able to squeeze out bubbles in the real estate market and achieve a soft landing by adopting a raft of measures.

Premier Wen Jiabao said last month that the government would resolutely curb the abrupt rise in property prices in some cities and satisfy people's basic need for housing.

However, experts held that the online predictions should be taken as a warning about the nation's bubbly property market.

"The bubble is big now," Cheng Enfu said, adding "the government must be highly alert on potential risk as it would hurt the country's economy and result in social instability if left uncontrolled."

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