ronnie \Whon a bubble is nota bubble |The Economist Bua preset Chinese property When a bubble is not a bubble Asevere imbalance in land supply fuels China’s wild property market Oct 15th 2016 | SHANGHAI | From the print edition ESTATE agents in China, as elsewhere in the world, are normally a smooth-talking, self-assured bunch. But 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 manie, 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. Flats 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 says. Mr Liu is in good company. Even the head of the central bank’s research bureau, usually cautious in his choice of language, has said a property bubble must be stopped before it gets too big. House prices have climbed by 16% nationwide over the past year, and double or even triple that in big Cities, So in the past two weeks more than 20 municipalities have tried to calm the market down— for example, by requiring higher down-payments or limiting purchases by residents of other cities. ‘As the past decade has shown, the ups and down of Chi significance. Totting up the property sector's impact on investment and consumption (all the s housing market are of global furniture and gizmos that fill new homes), it accounts for about a quarter of Chinese GDP. So this year's rebound has prompted both hope and dread. It has helped GDP growth stabilise at about 6.7%, faster than most analysts forecast in January (third-quarter data will be released on October igth). 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 up to 60% in core districts of mid-sized cities. Even more worrying has been the increase in property developers’ borrowing. Zhang Zhiwei of Deutsche Bank htpihwww eccnomist cominewstinance-and-econemics/21708674-severe-imblanceland-supply-fuals-chinas-wil-propery-market.whon-bubblalprint 13,sarwaote Whar a bile is ret bute |The Ecanamist says they face a prisoner's dilemma: if 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. Mr Zhang examined 252 of these land auctions and concluded that two- fifths of winning bidders will lose money if house prices level out, let alone decline. The sharp rise i Raising the roof again in house prices China, prices of newly built houses also 70 big cities, % change on a year earlier seems out of kilter with the broader economic picture. Income growth is slowing asthe economy matures, making homes steadily tess 2011 12 #413 «414 «415 16 Source: Wind Info nomist.com affordable. That helps explain the frenzy in the market. During a holiday week at the start of October, huge crowds swamped sales centres 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. Such behaviour smacks of irrational exuberance, but caution is in order before delivering that verdict. Investors, analysts and the press have been predicting Chinese real-estate Armageddon for the better part of a dee: time, typically when the government clamps down on buying, only to take off again every few years. le, But there has been no nationwide crash. Prices have weakened for a For alll the signs of excess, officials have in fact done well to guard against the biggest potential vulnerability: over-borrowing by homebuyers. Despite a recent surge in mortgage lending, household balance-sheets are on the whole in good shape. Moreover, strict down-payment rules htpihwww economist comnewstinance-and-econemics/21708674-severe-imblanceland-supply-fusls-chinas-wil-propery-market.whon-bubblalprint 23ronnie \Whon a bubble is nota bubble |The Economist ‘mean that buyers typically put up cash for as much as half the price of the home. Even if prices fall, they are unlikely to walk away from their mortgage debt. This helps insure against the downward spiral of foreclosures and falling prices that has wreaked havoc in other countries. This is not to deny that the Chinese property market faces serious problems. But “bubble” may be a misdiagnosis. The real pathology is a severe imbalance in land supply, argues Larry Hu of Macquarie Securities. Smaller cities have plenty of land for building but shrinking populations. Big cities, where people actually want to live and work, are sitting on large land banks but releasing only small plots. Shanghai has about 1,800 sq km of farmland but sold only five sq km for home- building last year. The result, predictably, has been soaring home prices. Why not sell much more land in big citi game, causing pain for lots of important players, Mr Hu argues. Governments in big cities count on Doing so would fundamentally alter the rules of the incremental land sales as a source of revenue; governments in small cities hope the restrictions will eventually send people their way. This is, in other words, a political problem as much as an economic one. Mr Liu, the agent at the Malu development, knows both sides of the property market. A few years ago he bought a flat in his home town of Jiuhuashan, a five-hour drive to the south-west. It now gathers dust, empty except for a week during the Chinese New Year holiday, when he returns, home. Still young, he has no intention of moving back to Jiuhuashan permanently. The mountains there are stunning but the economy sleepy. Rather, Mr Liu hopes to buy a home in Shanghai eventually and has started saving up for it. The booming prices of the past year have kept him busy at work, but pushed his dream ever further into the distance. From the print edition: Finance and economies pik economist cominewslinance-and-economics/2170867/-severe-imbslance-land-suppy-fuel-chinas-wild-property-market-wher-bubblagrnt a3