Real Estate Bubbles Loom in China

Home>>Business

Last updated at: (Beijing Time) Wednesday, October 16, 2002

Real Estate Bubbles Loom in China

DISCUSSION

CHINESE

SEND TO FRIEND

If rapid economic growth always goes with a sizzling real estate market, this is right the picture across China today: hectic building sites, buzzing cranes, smoke-belching bulldozers, and hurried rural workers.

But rising on these sites, analysts fear, may be not merely houses, but also real estate bubbles. More and more houses, particularly those luxurious residences, have been waiting for buyers ever since the day they were finished.

Over the first eight months of this year, the total area of vacant houses across China increased by 14.1 percent, compared with the same period last year, up 13.2 percentage points, according to the newest national housing sentiment index issued by the National Bureau of Statistics.

Of the unsold houses, about 43.97 million square meters, which are 11.5 percent more than those of the same period last year, have been idle for over a year.

By July of this year, capital held standstill by the vacant houses shot up to 250 billion yuan (US$30.23 billion), the No 1 non-performing assets in terms of its size in all the industries in current China, according to the Beijing-based China Business Times.

There have been warnings in media against the likely recurring real estate bubbles in early 1990s, when the overheated housing market triggered a two-digit inflation, peaking at 27 percent in 1994.

Even today, some southern provinces such as Guangdong and Hainan are still scratching their head over the half-finished buildings left by the over-investment during that period.

Overheated or not?

But some analysts think the so-called real estate bubbles have been exaggerated.

In terms of capital flow, the investment to the real estate sector during the first half of this year edged up simply by 32.9 percent, compared with the same period last year, according to the News Weekly, a journal sponsored by the China News Agency.

For the whole 2002, the growth rate of capital into the real estate sector should be under the level of 29.2 percent in last year, well below the capital surge during early 1990s when the capital supply for the real estate development doubled every year from 1992 to 1994 in southern provinces of China, according to Bao Zonghua, vice-president of the China Association of Real Estate and Housing Research.

"The normal growth rate of investment in China's current real estate market should be 15 to 20 percent per year," Bao was quoted as saying by the journal. "The around 30 percent growth rate might appear a little higher, but it's accountable, given some special reasons, for example, Beijing's preparation for the 2008 Olympic Games."

Some others also point China's entry of the World Trade Organization (WTO) and the ensuing investment spree by overseas capital as reasons for the current heat in the real estate market.

However, a more plausible explanation may be China's ongoing reform of its housing supply system starting from 1998, when most Chinese families were told to buy their own houses rather than, as before, to wait their firms or government to assign their flats.

The actual performance of the real estate market seems to support such a viewpoint.

This round of real estate investment heat started in 1998 and, after overtaking the former peak level in 1994, has maintained a rapid growth until now both in terms of the investment scale and the total area under construction.

In 2000, the total housing area under construction surpassed a critical level of 200 million square meters and jumped up further nearly 30 percent last year, according to the journal.

"We cannot say the real estate market is now creating bubbles, because the consumers' demand is true," Zhao Yanjing, director of the China's Institute of City Planning, was quoted as saying by the magazine.

"The real problem might lie in those prohibitive luxurious apartments, a most likely place puffing the bubbles," she said.

Hot bubbles somewhere

So, it seems safe to say that there surely be some bubbles somewhere in China, although the bubbles have not been contagious across the country.

During the first eight months in this year, Beijing witnessed 4.97 million square meters of commercial residential buildings finished, up 30.9 percent compared with the same period of last year. But meanwhile, only 4.28 million square meters were sold out, a year-on-year increase of 12.8 percent.

Obviously, houses are being built much faster than they are bought away.

By the end of the past June, more than 7 million square meters of commercial residential space were vacant, most of which are US$1,200-or-above-per-square-meter extravagant villas, apartments, and office and business space, according to the China Business Times.

Over the first half year in south China's Guangdong Province, there were 89.28 million square meters of housing space under construction, a quadruple of the total area sold in the previous year. Meanwhile however, the growth rate of sold housing dropped by 18 percent, said the newspaper.

So far, the vacant housing area in Guangdong Province stands at 20 million square meters, one fifth of the nation's total, according to the newspaper.

In eastern China's Shanghai, the much-talked China's would-be financial hub, the rocketing house prices have kindled great dissatisfaction in local residents, forcing the local authorities to take measures to make the overheated real estate market cool a little off.

What's worrisome is that the bubbles seem to be spreading beyond super-sized cities to other relatively underdeveloped inner land such as central China's Hubei Province, southwest China's Sichuan and Chongqing provinces and the coastal Shandong Province.

Who are stoking the fire?

But who are fanning up the fire in the housing market?

The first suspects should be the local governments.

For them, a heating-up real estate market is attractive for at least two reasons: On the one hand, rising skyscrapers and tree-like apartments are really the corporeal proof of their administrative performance; on the other hand, a hustling real estate market will easily hype up the growth rate of the local economy, another laudable merit before the central government.

Experts estimate that the contribution by the real estate sector to China's overall gross domestic product is between 1.9 to 2.5 percent.

Local governments' decisive power in land approval has also facilitated their drive to heat up the real estate market.

Now that all land is so-called "State-owned", governments, as the legal proxies of the State, seem naturally entitled to disposing with the land.

Through legal or underhand means, whoever can get cheap land from the governments will surely make quick money.

Then another question is where the money comes from?

Here comes the second suspects - the banks.

Money out of the banks, mostly the State-owned banks, has for all the time been a significant source of money supply to the real estate sector.

To date, of all loans out of China's financial institutions, 10 percent have flowed to the real estate sector, according to the China Business Times.

To get the money, some developers even turn to deceits, for example the false mortgages, to hoax money out of banks.

The banks, nonetheless, do not seem to worry too much over this. They blindly believe that as long as they hold the mortgages in hand, their money is safe.

The last stokers of the current real estate heat are overseas investors.

From either Hong Kong and Taiwan, or European and American investment institutions, they trust that they will be able to take a spoonful of the profit soup served with China's WTO accession and the investment spree before Beijing's 2008 Olympic Games.

By now, a familiar picture once appeared prior to the east and southeast Asian financial turmoil in 1997 seems to loom ahead: prosperous-looking real estate market and the overall economy, banks' deep involvement into the real estate market, ever-expanding credit, and finally the burst of bubbles.

Will history repeat itself? - Sometimes, it does.

By PD Online staff Forest Lee

Questions?Comments? Click here

Chinese Real Estate Market not Overheating: Minister

China's Real Estate Tipped to Blossom in Second Half Year

Shanghai Worries About Real Estate Bubble

China's Automaker Invests in GM-Daewoo Joint Venture ( 2 Messages)

At least 182 Dead in Indonesian Island Blast: President ( 2 Messages)

Multinationals Fight for Chinese Markets ( 80 Messages)

China Opposes US Congress Committee's Interference in China's Internal Affairs ( 33 Messages)

Fewer Slogans, More Practical, Reflect Social Changes in China ( 31 Messages)