Opinion

Is the real estate bubble a hot air balloon?

By Chen Yongrong, Zhang Zhengfu and Wang Lili (China Daily)
Updated: 2010-01-16 07:52

China has some problems with its economy despite a promising outlook, and one of them is surging housing prices.

Over the past month, the government has adopted several measures to curb soaring property prices and stop speculation, but economists and industry insiders say they would take time to work.

A recent New York Times report, quoting Wall Street hedge fund investor James S. Chanos, warned that China's economy was headed for a crash. "Its (China's) surging real estate sector, buoyed by a flood of speculative capital, looks like 'Dubai times 1,000 - or worse'," Chanos said.

Wang Xiaoguang, a researcher with the Chinese Academy of Governance, said nobody would believe China's property market did not have bubbles. A record surge in bank lending in 2009 coupled with the government's stimulus package has created a relatively big bubble in China's economy.

Yi Xianrong, a researcher with the Chinese Academy of Social Sciences, corroborated Wang, saying: "China's real estate market is plagued by big bubbles, creating great risks for the financial sector."

The real estate sector has gobbled up a big percentage of the new loans issued by banks to boost domestic demand in order to overcome the global economic crisis. In fact, loans to property developers and residents to buy homes accounted for 20 percent of the total new loans, Wang Zhaoxing, vice-chairman of China Banking Regulatory Commission, said at a conference on Wednesday. He did not mention the time period, though.

But Wang Xiaoguang, along with some other experts, does not believe in the "crash theory" of Chanos. "Bubbles do exist, but China's economy is not heading for a crash. And the claim that China's property sector is more inflated than Dubai's is an exaggeration."

"The property markets of China and Dubai are not comparable," said Yang Hongxu, a property researcher at E-House China R&D Institute. Citing the example of Shanghai, he said price in China's commercial capital rose mainly because of rapid economic growth, population expansion and increased residential income, factors that Dubai lacked.

Besides, Dubai did not implement a series of government policies to contain the bubble at an early stage.

The Chinese government has adopted several measures in the past month to do exactly that. Among other things, it has re-imposed a sales tax on houses sold within five years of their purchase from this year.

The latest move comes from the State Council, China's cabinet. It issued guidelines over the weekend, raising the down payment to at least 40 percent for families that apply for loans to buy a second house. The guidelines also say mortgage rates should be settled strictly on the basis of loan risks.

On Tuesday, People's Bank of China, the country's central bank, took another move to cool the property market by raising the deposit reserve requirement ratio by 0.5 percentage points from Jan 18.

The next day, the government renewed its pledge to stabilize housing prices by providing more affordable houses and cracking down on speculators in the realty sector. "Such moves show the determination of the government to check rising property prices," Yang said.

The policies have already caused a sharp fall in sales of second-hand houses. Right after the sales tax was extended to houses sold within five years of their purchase, the daily sale of second-houses in Beijing fell to 19 from Jan 1 to Jan 3. The number is well below that sold at the end of last year, according to data from the Beijing municipal commission of housing and urban-rural development.

But experts have said the property market still needs time to react, especially in terms of prices, because it is one thing to adopt policies and quite another to ensure they are fully implemented.

Referring to the 11 specific measures included in the State Council guidelines, Pan Shiyi, chairman of China's leading property developer SOHOChina, said the last was the most important because it emphasized the responsibility of local governments to carry out the other ten.

Yi Xiangrong put the entire real estate sector in perspective: "Whether the desired effects can be achieved will depend on the extent and intensity with which the policies are enforced."

The authors are writers for Xinhua.