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Olympic Dreams, WTO Hopes Fan China Housing Boom
China's imminent entry to the World Trade Organisation and the successful bid by Beijing to host the 2008 Olympics are helping fan a residential property boom which analysts expect to run through 2002.
Although the causes might be different from a speculative property boom in the early 1990s, the surging market is sparking fresh concerns that a new property bubble is being created.
Property prices bottomed out in late 1999 and began to rebound as the government stoked buying with housing reforms and easy loans to encourage domestic consumption.
"A sound economy, housing reforms and the Olympics are expected to underpin the property sector for the next several years," said Wu Jianzhong, an economist at the state-backed China Economic Monitoring Centre.
"Housing prices are expected to stabilise by 2003 to 2004 and grow at a more rational pace afterwards," he said.
Housing prices jumped 11.1 percent year on year in the first half of this year, with Beijing and some other areas surging more than 25 percent, the State Statistical Bureau said.
Officials have expressed worries over a property bubble but analysts said the government was likely to stay out of the way as it encourages domestic consumption to boost the economy.
Some analysts estimate the property sector had contributed around 1.5 percentage points to China's economic growth annually in the past two years.
The current frenzy of home buying stemmed from rising urban incomes and reforms started in 1998 which ended state-allocated housing, once a hallmark of the planned economy.
Chinese analysts say the reform is basically finished as state firms and agencies have sold off about 95 percent of public housing at discounted prices.
WORRIES OVER SPECULATION The government has also ordered state-owned banks to increase home lending, allowing them to offer mortgage loans of up to 30 years with a down payment of 20 percent of the purchase price.
Commercial mortgage loans for terms of six to 30 years carry an annual interest rate of 5.58 percent.
"The robust growth in the real estate sector is largely backed by the support of bank loans and huge demand in major cities," said Dai Yuanchen, an economist at the Chinese Academy of Social Sciences.
But the government fears the market is getting out of control.
State units alone pumped 265.2 billion yuan (US$32 billion) into property -- both residential and commercial -- in the first seven months of this year, up a whopping 31.6 percent.
Minister of Construction Yu Zhengsheng said earlier this month the price surge in some cities was "irrational" and pledged more low-cost housing to cool off the market.
China aims to build 2.7 billion square metres of urban housing over the next five year to expand housing space to 23 square metres per person.
A speculative property bubble in the early 1990s is still fresh in the minds of many government officials.
When the bottom fell out of the market in the mid-1990s, it sent shivers through the financial system and saddled China with massive property supply which is still vacant in some cities.
"The difference between this boom and the bubble in the 1990s is most buying is by individuals and most people are buying their own homes for living, rather than investment," said an analyst at an investment bank.
OLYMPIC DREAMS, WTO HOPES Beijing is the notable exception.
Developers in China's capital have been using the concept of a "central business district" in the eastern part of the city and Olympic venues mainly in the north to push up prices.
"Beijing is a very special place. The market is temporarily imbalanced," said Bob Zhang, economist at BNP Paribas Peregrine in Beijing. "But I think the price surge is temporary."
Housing prices in Beijing -- typically China's highest due to higher land costs -- reached 4,771 yuan per square metre in June against the national average of 2,304 yuan. Shanghai came second at 3,297 yuan.
China's entry to the WTO, expected by early next year at the latest, is also driving up property prices in Beijing and other cities expected to attract foreign companies.
The optimism has carried over into the stock market, where property shares have rallied over the past two months during a market downturn.
"Even loss-making real estate companies have benefited from the latest enthusiasm for property shares," said Guo Chunyan, an analyst at domestic brokerage Huatai Securities.
"Prices of many property shares cannot be justified by corporate fundamentals," she said.
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