Real-estate agents in China, as elsewhere in the world, are normally a smooth-talking, self-assured bunch. Nonetheless, Liu Zhendong, a salesman at a large development in the northern reaches of Shanghai, is afflicted by doubts.
He had expected business to be solid and steady this year. Instead it has been manic, with clients jostling to see show apartments. Some had hoped to wait for the market to cool, but capitulated and bought as prices climbed higher week after week. Apartments in the area, the once-rural village of Malu, still dotted with fields and scruffy wholesale-food markets, now cost 90% more than a year ago.
“It feels a bit like a bubble,” he said.
Liu is in good company. Even the head of the central bank’s research bureau, usually cautious in his choice of language, has said that a real-estate bubble must be stopped before it gets too big. Home prices have climbed by 16% nationwide during the past year, and double or even triple that in big cities. In the past two weeks more than 20 municipalities have tried to calm the market down by, for example, requiring higher down payments or limiting purchases by residents of other cities.
As the past decade has shown, the ups and down of China’s housing market are of global significance. Adding up the real-estate sector’s impact on investment and consumption—all the furniture and gizmos that fill new homes—it accounts for about a quarter of Chinese GDP. Thus this year’s rebound has prompted both hope and dread. It has helped GDP growth stabilize at about 6.7%, faster than most analysts forecast in January. Stronger demand for iron ore and copper has given beleaguered miners a measure of relief.
Optimism, however, has been tempered by concerns about the nature of the revival. Surveys indicate that about one-fifth of buyers are investors rather than owner/occupiers. CEBM, a research firm, estimates that this share rises to as much as 60% in core districts of mid-sized cities.
Even more worrying has been the increase in developers’ borrowing. Zhang Zhiwei of Deutsche Bank said that they face a prisoner’s dilemma: If they are too conservative, they will get squeezed out of the market, so they choose to be aggressive. They have driven up land prices by 66% this year, according to an index of 100 leading cities. Zhang examined 252 of these land auctions and concluded that two-fifths of the winning bidders will lose money if home prices level out, let alone decline.
The sharp rise in home prices also seems out of kilter with the broader economic picture. Income growth is slowing as the economy matures, making homes steadily less affordable.
That helps explain the frenzy in the market. During a holiday week at the start of October, huge crowds swamped sales centers when new properties were put on the market. In Shanghai divorces have spiked as people take advantage of a loophole in regulations: Couples can get a preferential mortgage rate only on their first home. Divorced spouses can benefit by buying homes separately and then remarrying.
© 2016 Economist Newspaper Ltd., London (October 15). All rights reserved. Reprinted with permission.