Property risks loom over China’s economy

Posted on October 19, 2016

In May, Peng Guangsheng stood in a long queue at the Gu’an county government office in Hebei province, near Beijing’s city limits. As a waidi ren or “outsider” from Suzhou in eastern China, Mr Peng needed special approval to buy a property in Gu’an and was restricted to one purchase.

It was worth the wait. Mr Peng sold his property a few months later for a quick profit after prices at local developments such as Peacock City, United Kingdom Palace and Provence Garden doubled to Rmb24,000 ($3,600) per square metre in just six months. He believes he got out just in time.

“Gu’an prices have gone up too much,” Mr Peng said this week. He is reluctant to buy there again and is similarly downbeat about prospects in Beijing, where he has also invested. “Housing prices have peaked and are due for a downturn. I will not buy again in Beijing until prices come down.”

China’s housing market is bubbling over. A boom in values in metropolises such as Beijing, Shanghai and their environs — up 25 per cent or higher over the past year alone, according to Savills China — has spread to smaller cities this year. In August, real estate prices in the southeastern coastal city of Xiamen were up 40 per cent over a 12-month period.

The even bigger surge in Gu’an highlighted one of the area’s unique selling points. Local developers have touted the county’s proximity to Beijing’s second international airport. Beijing Daxing, an Rmb70bn work in progress scheduled for completion in 2018, is just 40km to the north.

Real estate and infrastructure investments have helped the Chinese government meet its economic growth targets this year. On Thursday Beijing announced that gross domestic product had grown 6.7 per cent in the third quarter compared with the same period last year.

But with its year-end target of 6.5-7 per cent growth now virtually guaranteed and anger growing among those priced out of the market, an increasing number of municipal governments are taking measures to cool overheated property markets.

Fourteen localities introduced home purchase restrictions during the week-long National Day holiday in early October. The measures include stopping people from buying additional homes and lowering the amount that can be borrowed on a given mortgage downpayment. In total 22 cities this year have tightened their house purchase policies.

The need to save exorbitant amounts of money for a flat helps explain why China has one of the world’s highest savings rates, damping consumption and frustrating the government’s efforts to rebalance the economy away from debt-fuelled investment to services.

Like Mr Peng, Stephanie Guo, a 27-year-old banker in Beijing, also had her eye on a property in May but held back at the last minute. The flat, located within the capital’s fifth ring road and in the same district as her office, was selling for Rmb50,000 per square metre. It now costs Rmb65,000.

“Considering that fifth ring road properties are already so expensive, I am looking at places in Tongzhou,” Ms Guo says, referring to a district further out. “But even Tongzhou is very expensive now.”

Government officials are also beginning to worry about the debt that is fuelling the property boom. Total mortgage loans outstanding grew by more than 30 per cent year on year in the second quarter, according to central bank figures, while mortgage rates are at historical lows.

Loans to developers and homebuyers account for 70 per cent of new credit creation this year, according to Shen Jianguang, chief economist of Mizuho Securities Asia. Mr Shen compares China’s housing bubble to Japan’s in the 1980s. “There’s a feeling [among developers] that it doesn’t matter how much you’re borrowing or where you’re borrowing from, it’s all fine if prices continue rising,” he says.

Reining in overheated property markets will, however, come at a cost to the broader economy. The construction and real estate sectors together accounted for a fifth of real GDP growth in the first half of this year, says Liang Hong, chief economist of China International Capital Corporation.

As a result, many are sceptical that Beijing will take decisive measures to end the boom. “The government won’t risk national growth in order to cool these hotspots,” said Rosealea Yao, housing analyst at Gavekal Dragonomics, a consultancy.

The divergence of China’s regions also means there is no one-size-fits-all national policy. While prices soar and inventories drop in first and second-tier cities, the opposite is happening in smaller urban areas in slower growing regions. Ms Yao estimates that 40 per cent of China’s local housing markets have large overhangs of unsold inventory.

Because of the difficulty in co-ordinating policy action nationwide, it has been left to local governments to respond as best they can. “These [city-specific] policies are a short-term response to slow the most aggressive price rises,” says James MacDonald, head of research at Savills China. “They were not designed to fix the market but to buy time for the government to come up with longer term policies to increase supply.”

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