A severe imbalance in land supply fuels China’s wild property market
ESTATE agents in China, as elsewhere in the world, are
normally a smooth-talking, self-assured bunch. But Liu Zhendong, a salesman at
a large development in the northern reaches of Shanghai, is afflicted by
doubts. He had expected business to be solid and steady this year.
Instead, it
has been manic, with clients jostling to see show apartments. Some had hoped to
wait for the market to cool, but capitulated and bought as prices climbed
higher week after week. Flats in the area, the once-rural village of Malu,
still dotted with fields and scruffy wholesale food markets, now cost 90% more
than a year ago. “It feels a bit like a bubble,” he says.
Mr Liu is in good company. Even the head of the
central bank’s research bureau, usually cautious in his choice of language, has
said a property bubble must be stopped before it gets too big. House prices
have climbed by 16% nationwide over the past year, and double or even triple
that in big cities. So in the past two weeks more than 20 municipalities have
tried to calm the market down—for example, by requiring higher down-payments or
limiting purchases by residents of other cities.
As the past decade has shown, the ups and down of
China’s housing market are of global significance. Totting up the property
sector’s impact on investment and consumption (all the furniture and gizmos
that fill new homes), it accounts for about a quarter of Chinese GDP. So this
year’s rebound has prompted both hope and dread. It has helped GDP growth
stabilise at about 6.7%, faster than most analysts forecast in January
(third-quarter data will be released on October 19th). Stronger demand for iron
ore and copper has given beleaguered miners a measure of relief.
Optimism, however, has been tempered by concerns about
the nature of the revival. Surveys indicate that about one-fifth of buyers are
investors rather than owner-occupiers. CEBM, a research firm, estimates that
this share rises to up to 60% in core districts of mid-sized cities. Even more
worrying has been the increase in property developers’ borrowing. Zhang Zhiwei
of Deutsche Bank says they face a prisoner’s dilemma: if too conservative, they
will get squeezed out of the market; so they choose to be aggressive. They have
driven up land prices by 66% this year, according to an index of 100 leading
cities. Mr Zhang examined 252 of these land auctions and concluded that
two-fifths of winning bidders will lose money if house prices level out, let
alone decline.
The sharp rise in house prices also seems out of
kilter with the broader economic picture. Income growth is slowing as the
economy matures, making homes steadily less affordable. That helps explain the
frenzy in the market. During a holiday week at the start of October, huge
crowds swamped sales centres when new properties were put on the market. In
Shanghai, divorces have spiked as people take advantage of a loophole in
regulations. Couples can get a preferential mortgage rate only on their first
home. Divorced spouses can benefit by buying homes separately and then
remarrying.
Such behaviour smacks of irrational exuberance, but
caution is in order before delivering that verdict. Investors, analysts and the
press have been predicting Chinese real-estate Armageddon for the better part
of a decade. But there has been no nationwide crash. Prices have weakened for a
time, typically when the government clamps down on buying, only to take off
again every few years.
For all the signs of excess, officials have in fact
done well to guard against the biggest potential vulnerability: over-borrowing
by homebuyers. Despite a recent surge in mortgage lending, household
balance-sheets are on the whole in good shape. Moreover, strict down-payment
rules mean that buyers typically put up cash for as much as half the price of
the home. Even if prices fall, they are unlikely to walk away from their
mortgage debt. This helps insure against the downward spiral of foreclosures
and falling prices that has wreaked havoc in other countries.
This is not to deny that the Chinese property market
faces serious problems. But “bubble” may be a misdiagnosis. The real pathology
is a severe imbalance in land supply, argues Larry Hu of Macquarie Securities.
Smaller cities have plenty of land for building but shrinking populations. Big
cities, where people actually want to live and work, are sitting on large land
banks but releasing only small plots. Shanghai has about 1,800 sq km of
farmland but sold only five sq km for home-building last year. The result,
predictably, has been soaring home prices.
Why not sell much more land in big cities? Doing so
would fundamentally alter the rules of the game, causing pain for lots of
important players, Mr Hu argues. Governments in big cities count on incremental
land sales as a source of revenue; governments in small cities hope the restrictions
will eventually send people their way. This is, in other words, a political
problem as much as an economic one.
Mr Liu, the agent at the Malu development, knows both
sides of the property market. A few years ago he bought a flat in his home town
of Jiuhuashan, a five-hour drive to the south-west. It now gathers dust, empty
except for a week during the Chinese New Year holiday, when he returns home.
Still young, he has no intention of moving back to Jiuhuashan permanently. The
mountains there are stunning but the economy sleepy. Rather, Mr Liu hopes to
buy a home in Shanghai eventually and has started saving up for it. The booming
prices of the past year have kept him busy at work, but pushed his dream ever
further into the distance.
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