Date
23 July 2017
Local governments, developers, banks and speculators are all gaining from the sizzling property market, but society may have to pay a heavy price if the bubble bursts. Photo: China News
Local governments, developers, banks and speculators are all gaining from the sizzling property market, but society may have to pay a heavy price if the bubble bursts. Photo: China News

China’s housing dilemma

China’s housing market is red-hot, with some cities having seen home prices soar 50 percent in one year.

It wouldn’t be surprising if the price surges were limited to big cities like Beijing, Shanghai and Shenzhen.

These metropolises have strong economic fundamentals. They also keep attracting people from other parts of the country.

Such a strong demand will support higher property prices.

However, the frenetic pace of price gains is also witnessed in second and third-tier cities such as Nanjing, Dongguan, Huizhou, Xiamen, Suzhou and Kunshan.

Instead of genuine demand, speculative buying has been the key force behind the dramatic surge in prices in these cities over the past one year.

These cities are said to be attracting speculators from all over the country. If the bubble bursts, the ramifications could be serious.

It’s not only the fault of crazed investors. Local governments, property developers, and banks all have a hand in inflating the housing bubble.

Taking advantage of the strong market, local governments are quick to sell more plots of land, leading to record-high transactions.

Up to two-thirds of the buyers of these expensive land plots are state-owned firms, according to People’s Daily.

Banks, meanwhile, are flooded with liquidity from huge amounts of deposits; they have to look for ways to lend them out to turn a profit.

Property loans are generally regarded as good assets to own given their strong track record.

Banks, therefore, have been keen on such lending, even though they know many of the borrowers are speculators.

To address the situation, Hangzhou, Nanjing, Wuhan and Hefei have imposed home purchase restrictions, such as raising the down-payment ratio for second homes from 30 percent to 40 percent.

However, these measures have had very limited effect since speculators have found various ways to circumvent the rules.

In fact, there are doubts if local governments are really determined to cool the housing market.

After all, handsome land sale proceeds form a key part of local government income. Some cities also need money to pay off their debts.

It goes without saying that as long as property prices keep going up, developers are happy.

Yet all these short-term gains may come at the expense of the general public, which may have to pay a hefty price one day.

If Beijing takes a tough stance now, it could take a heavy toll on economic growth and social stability.

However, if Beijing turns a blind eye to the risks, the property bubble will continue to grow bigger and trigger a catastrophe.

This article appeared in the Hong Kong Economic Journal on Sept. 22.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

CG

Hong Kong Economic Journal columnist

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