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Home >> Business
UPDATED: 10:10, December 20, 2004
China Economic Review: housing prices, a puzzle to be solved
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Chinese housing prices have surprised almost everyone by surging throughout 2004, despite the country's efforts to cool them down, property developers' expectation for steady growth and experts' fear of a bubble burst.

As 2004 comes to a close, there is still no clear answer to whether the country's housing price hike is reasonable or dangerously inflated, as different parties have different opinions.

A vivid parable has recently been used in the Chinese media to describe spiraling housing prices: It is like a naughty boy climbing a flagpole, going higher and higher, ignoring his parents' concerns for his safety. The more people look at him, the more excited he becomes, and the higher he climbs.

The continuous price elevation has put the housing industry under the media spotlight. By the end of November, it has jumped 12.5 percent year-on-year. The growth rate is even higher in 35 major cities.

The government has made intensive efforts to moderate price hikes. It tightened control on the land and bank loans to cool down the overheated investment. It raised the requirement for consumers borrowing commercial loans to buy a second house. The central bank even raised the benchmark interest rate by 0.27 percentage points in October, the first time in nine years, to discourage people from investing in property.

But the price is still roaring, accompanied by widespread concern: Has the housing market crossed the line between healthy growth and artificial bubble? Has the naughty boy climbed too high?

Forums on property industry growth have been held across the country, with government officials, property developers and academics responding differently. Statistics, like the vacancy rate and sales volume, considered effective tools to measure market development, turn out to support controversial arguments with different interpretation.

A Construction Ministry report says that the talk of a "bubble" is ungrounded and the price increase has solid support from marketdemands.

But many experts say that not only is the housing bubble real, it is on the verge of bursting. As a 'pet' of the government, the housing industry has become one of the major tax contributors. That explains the government's dilatory work to handle the overheated property investment over the past years, according to complaints by experts sticking to the bubble argument.

Yi Zhongli, a researcher with the Chinese Academy of Social Sciences (CASS) said property developers have been manipulating business data and the government's conclusions are therefore unreliable.

Unprecedented family debt is accompanying the high housing prices. A CASS survey shows the current ratio between family debt and disposable income is 155 percent in Shanghai and 122 percent in Beijing, while five years ago very few Chinese families had any debt at all.

While people are arguing, the "naughty boy" on the flagpole keeps going up. On Nov. 15, Shanghai's average housing price exceeded 10,000 yuan(some 1,200 US dollars)per square meter for the first time. Still, only 749 houses were sold.

The situation leaves ordinary buyers more bewildered. A Beijing computer designer surnamed Chen has planned to buy a house for two years, but still remains an armchair strategist.

"With all the government's new policies and all the media analysis, I am really afraid the bubble may burst after I buy the house," he said.

"However, the price is still getting higher and higher. My money prepared for the initial payment may become inadequate again if I wait for another couple of months."

Despite surging prices, days for property developers have become tougher.

Chinese property developers are haunted by three numbers this year: No. 121 document, October 31 deadline and a rise of 27 basis points of benchmark interest rate.

The No. 121 document, issued last year, stipulated that developer's own capital should stand 30 percent of their total investment, 10 percentage points higher than before. The requirement was further raised to 35 percent this year. While the bank tightens control on the loans, the developers have to find new financing channels.

Then in late October, the central bank raised for the first time in nine years its benchmark interest rate by 27 basis points. The higher lending interest rate surely puts heavier burden on developers' financing cost.

"Companies, no matter big or small, already feel restrained in the capital chain," said Gu Yunchang, secretary-general of China Real Estate Association (CREA).

After August 31, commercial land could only be auctioned through public bidding. Developers could no longer obtain cheap land simply by negotiating with local officials.

"Real estate companies are undergoing a body checkup now," said Gu. "Weak companies engaged in irregular operation may finally be phased out in this process."

Meng Qun, general manager of the Tianjin Teda Company Limited called the country's campaign "winter" for property developers. "This year will mark the turning point of Chinese property industry, we will be able to play in a more orderly, healthy market with bigger competitors," he said.

Some property experts have commented that when everything is different from what has happened in history, it is impossible to know where the market is heading.

Only time will tell if the boy keeps climbing or falls back to Earth.


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