July 20,2009

China's Real Estate Party Heading for a Painful Morning-After

By CSC staff, Shanghai

Real estate markets in China's eastern cities are going crazy. Investors are rushing to big cities to get into the housing market, possibly portending approaching inflation.
On July 17 in Nanjing, capital city of Jiangsu Province in central eastern China, 3175 people bid for over 600 apartments, prompting the developer to suspend the sales and bring in government overseers to supervise the process. The bidding was broadcast live on the Internet to guarantee the whole process was fair.

In neighboring Zhejiang Province's capital of Hangzhou, city residents are spending their weekends receiving friends and relatives from other cities in the province who are rushing into town to buy into new housing in the city.

Investors�interest in big city housing is at least in part due to inflation concerns. Although China's CPI still saw negative growth in the first half of the year, the vast and ongoing loose lending policy has convinced many investors that China will see a new round of inflation in the next few years. Much of the cash entering the real estate market is to hedge such risk. According to a recent China Index Academy report, due to a second quarter, 2008, price fallback, in the first half of this year the number of residential housing transactions in major cities, including Beijing, Tianjin, Chongqing, Shenzhen, Hangzhou, and Wuhan, grew by nearly or over 100%, year on year. The trade volume has basically recovered its 2007 levels. 

Shanghai housing prices had grown for four straight months by the end of June to 11,108 yuan/square meter, a new high for the city. The price for one housing project in Nanjing rose five times in the first five months of the year.

The buying, which is beginning to resemble a panic, boosting prices along with inflation expectations, may yet lead to real inflation. In the first half of the year, China's new lending totaled 7.37 trillion yuan, well over annual credit levels for any whole year. There can be not doubt that a great deal of that has gone into the real estate market.

To back the nation's economic rebound as a whole, the central government plans to maintain a loose monetary policy, which means that even more cash is headed that way.

And the rising prices are of course boosting another facet of the industry: financing for real estate developers. Besides sales, developers are raising money from the stock market or other channels to buy new land and construct new projects. Many Chinese developers have already declared new financing plans.

That the real estate market party is bubbling, and that the bubble is not sustainable, is not a mystery.  The only question is when the dawn will come to greet the revelers and how bad the hangover is going to be.

The central government will not give up boosting credit-backed fixed assets investment before China's foreign trade begins to rebound and internal demand begins to rise. But government efforts to stimulate export and internal demand have been to little effect, and it seems it can only pour money into the economy through investment in infrastructure construction.

The China Banking Regulatory Commission is requiring banks to adhere strictly to the policy for second apartment purchase, but this is only a gesture, as are local governments�claims to stabilize housing prices. Bank loans now are mainly housing loans. Local government's main fiscal income is what they can get from land transfer fees.

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