Some seriously toppy property prices in China's major cities are creating fears of a major slide, writes CLIFFORD COONAN

COULD THE housing market collapse – wiping out our savings and dragging down the overall economy? It’s a scenario devastatingly familiar to many people in Ireland, but China’s fledgling property investors are only just getting used to the idea of living with the anxiety of a property bubble.

The Beijing government is seeking to limit the risk of asset bubbles after flooding the economy with money to drive a recovery from the financial crisis. Now market indicators and moves by the government have prompted concerns in China that the boom in residential housing may have run its course, with a price collapse coming next.

Housing transactions in cities including Shanghai jumped in August from July, while China Vanke, the country’s biggest developer, said sales increased 149 per cent from a year earlier. It’s looking very toppy, and economists are adding to the gloom.

“The key drivers of the property bubble are excess liquidity and lack of investment alternatives, which are still largely in place,” said Ken Peng, a Beijing-based economist for Citigroup.

Most of the property speculation in China takes place in the first-tier cities – Beijing, Shanghai, Guangzhou and Shenzhen, making these places a nightmare for first-time buyers.

China’s economy is continuing to expand strongly, although at a slower pace than before, but anxiety about a property bubble and its impact on overall political and economic stability in what is now the world’s second-largest economy, is dampening sentiment.

Could rising property prices in China be the next big threat for the world economy? With prices falling by 0.1 per cent on a month-to-month basis in June for the first time since February last year and gains on an annual basis continuing to ease, there are fears of a major slide.

“I don’t really feel safe about a lot of things like real estate prices, food prices, and also the stock market,” said Liu Yong, a 36-year-old Beijing resident.

While the Chinese property market certainly faces serious challenges in the coming months, most analysts believe the long-term trend remains positive because of mass urbanisation and the fact that China is still a developing market.

The Beijing government has a lot of room to act to stop any destabilising collapse in property prices. Maintaining social stability is crucial to the ruling Communist Party, and Beijing will intervene with whatever measures are required to make sure the property market does not become a problem.

Just how much supply there is in the residential market was suggested by a survey by the news website Sina.com, which found that about 51 per cent of Shanghai apartments, 66 per cent of Beijing flats and more than 70 per cent of units on the holiday island of Hainan were vacant at the end of June.

Zhao Guoping, a former general manager of a property development company in Yangzhou, said the vacancy rates do not reflect the reality of the housing market but were skewed by speculation in first-tier cities.

“The vacancy rate and low occupancy rate both reflected that the real estate market is twisted in some way. Controlling property speculation and letting the occupancy rate return to a normal level is imperative now,” Mr Zhao said.

Nerves were frayed when the China Banking Regulatory Commission (CBRC) told commercial banks last month to conduct stress tests on their property credit, to assess the impact on loan quality when China’s average property prices drop by up to 60 per cent, although it later said the tests were limited to declines of up to 30 per cent. There was speculation that this was a sign the government was looking for or expecting a larger correction in prices than previously thought.

The stress tests made the market so jittery that the banking regulator released a statement: “The assumption of various scenarios does not represent the CBRC’s prediction on the trend in the real estate market. Neither does it indicate possible changes in credit policy concerning the real estate sector,” it said.

Ren Zhiqiang, chairman of Huayuan Property Corporation, said there was great uncertainty about the current situation in the housing market.

“At the start of the year, there was uncertainty about macroeconomic policy, about real estate policy, inflation, bank credit, uncertainty about vacancy rates, etc.,” he told the Xinhua news agency. He urged his fellow property developers to abandon their resistance to the government’s tightening policy and focus on sales rather than price.

“The declining housing prices are what the government wants to see,” Mr Ren said, adding that he expected property prices to fall more sharply in the second half of this year when more houses come on the market.

The problem about forecasting on China’s property market is that it is uneven – the country has 150 cities with a population in excess of one million, and most property speculation is taking place in the first-tier cities – Beijing, Shanghai, Guangzhou and Shenzhen.

There are 12 second-tier cities, 30 third-tier cities and a great number that qualify as fourth-tier cities.

“It’s in the first-tier cities that we see more investment and speculation, more so than in the second-tier cities,” said James Macdonald, the head of China Research at Savills in Shanghai.

According to third-party sources, 20 per cent of transactions in first-tier cities are for investment purposes, with only 5 to 10 per cent of investment transactions in the second and third-tier cities.

Meanwhile, China’s grand project of encouraging rural residents to move from the countryside is continuing apace.

This is playing out even in seemingly saturated cities such as Shanghai.

“Urbanisation is still continuing. The government is trying to readjust supply to meet the demand caused by migration to urban centres,” Mr Macdonald said.

Shanghai’s population was 19.21 million at the end of last year, an increase of 328,600 on the previous year, according to data from the Shanghai Municipal Statistics Bureau.

Most analysts believe a property bubble is not imminent, and the focus instead is on punishing land-grabbing developers first and sustaining the supply of housing for low-income families.

“The government is trying to increase the supply of a certain type of housing, not as an investment but to meet the demand of end users,” Mr Macdonald said. “Whenever it comes to residential, we look at the long-term trend, and the outlook is very positive in a developing market like China’s.”

The government will focus on tightening measures, tinkering with the market but trying to avoid creating conditions for a serious decline.

A lot of attention at the moment is focused on a property tax and when the government will introduce it. Last week, regulators said they were getting ready to introduce the tax.

Citibank’s Ken Peng said extra tightening measures may include restrictions on pre-sales of apartments and curbs on the discounts banks can offer on mortgages. Officials may also accelerate programmes to increase the supply of housing and more strictly enforce existing restrictions on mortgages.

The biggest protection against a sharp fall in house prices will be rising wages and increased demand.

“The continuing rapid growth in personal income is the basic guarantee for the property price bubble to be absorbed gradually,” Liao Qun, the chief economist at Citic Bank, said. “A soft landing for the property market is both necessary and likely.”