Daily Management Review

The Wobbling Bubble of China’s Housing Industry


The Wobbling Bubble of China’s Housing Industry
In China, average prices for new homes rose 28 percent in Tier 1 cities, which encompass affluent metropolises like Shanghai, and 10 percent in smaller, Tier 2 cities in the first eight months of 2016, according to data compiled by Bloomberg.
The People’s Bank of China began easing lending requirements and cutting interest rates in 2014 and this is the time when the boom began. Money for new projects were helped rise as at the same time, the China Securities Regulatory Commission also lifted restrictions on bond and stock sales by developers.
Soon, in government land auctions, properties were selling for ever-larger sums. Up from 1.3 trillion three years before, China’s 196 listed developers had incurred 3 trillion yuan in debt by June 2016. And in a situation the Chinese describe as “flour more expensive than bread”, in many cities a square meter of undeveloped land is worth more than a square meter of a finished home nearby.
In a task made more difficult by the property fever’s uneven spread, officials are trying to end the exuberance without harming the economy. In less-wealthy Tier 3 cities, average prices are up only 2 percent this year. Giving them an incentive to increase the supply of developable land, many smaller municipalities rely on property sales to plug holes in their budgets. So while smaller cities have too many apartments and not enough buyers, premier cities have seen tight supply and high prices.
 “Usually the market moves in tandem. It’s quite dramatic to see Tier 1 cities need tightening and lower-tier cities need relaxation,” says Patrick Wong, an analyst with Bloomberg Intelligence in Hong Kong.
To help tailor the response, China is relying on local policymakers. And a rule that those buyers seeking a second property must make down payments of 80 percent, up from 50 percent and buyers with more than one mortgage will be ineligible for more were made in Suzhou, a Tier 2 city near Shanghai on Oct. 3.
Land auction sales have been capped at 150 percent of opening bids at Hangzhou, home of e-commerce giant Alibaba. It was investigating 45 developers and agents for allegedly engaging in false advertising and other unlawful activities promoting speculation, said the Ministry of Housing and Urban-Rural Development in early October, in an effort by the central government to crack down on rogue players.
China must take care to avoid triggering a bust with GDP growth slowing.
However there are risks for such measures succeeding too well. A 10 percent decline in housing prices nationwide would lead to 243 billion yuan in losses for developers, economists Zhiwei Zhang and Li Zeng estimated in a Sept. 28 report by Deutsche Bank. Since people have taken on more debt to buy property, consumer spending could fall, too. Compared with 35 percent in the first half of 2016 and 71 percent in July and August, mortgages accounted for 23 percent of new loans in 2014.  “The potential macro risk is alarming,” Zhang and Zeng wrote.
While this doesn’t indicate that real estate in China would face an imminent meltdown, President Xi Jinping must move cautiously given the importance of real estate to China’s economy.