No Confidence in China Markets Inflates Housing Bubble
Matthew Zhou and his wife spent 1.6 million yuan ($261,000) to buy a two-bedroom apartment last month in eastern Shanghai after seeing no potential for long-term returns in China’s financial markets.
“Home prices keep rising, so I’d rather buy a place now than put the money in the stock market,” said Zhou, a 30-year-old information technology engineer at a state-controlled bank in Shanghai, who plans to leave the home empty while the couple live with her parents. Gains in equities “could never outpace the growth of home prices,” he said.
The willingness of people like Zhou to shun other investments in favor of property shows why residential prices have defied a more than three-yearlong government campaign to rein them in and is among the forces crippling efforts by the central government to deal with an expanding housing bubble. New home prices in major cities, including Beijing and Shanghai, rose more than 10 percent in July from a year earlier, compared with a more than 10 percent drop in the benchmark Shanghai Composite Index (SHCOMP) during that period.
“Prices have been rising because China doesn’t have developed financial markets,” Yao Wei, a China economist at Societe Generale SA, said in an interview in Hong Kong. “Now, with the economy slowing, that has worsened as other investments don’t yield good returns compared with property.”
The Shanghai Stock Exchange Property Index, a gauge tracking property shares traded in Shanghai, rose 0.4 percent at the close today. The benchmark Shanghai Composite Index fell 0.2 percent.
A stock market that’s been stagnant for almost five years, a bond market in its infancy and bank-deposit rates barely above inflation have fostered a lack of confidence in other investment options, putting Premier Li Keqiang in a tough position as he steers the economy toward a 7.5 percent growth target this year.
The economy expanded less than 8 percent for the past five quarters, the first time that has happened in at least 20 years.
Li, who signaled in July he won’t tolerate a slowdown beyond a 7 percent bottom line, has come up with no new measures to rein in property prices since his predecessor in March, underscoring the role real estate plays in the world’s fastest-growing major economy. Property, construction and related industries account for about 20 percent of gross domestic product, according to Societe Generale.
“The government is not willing to announce property policies before it can find a good solution as property accounts for a very big part of China’s economy,” Ding Shuang, a senior China economist at Citigroup Inc. in Hong Kong, said in an interview. “China has come to a stage where it couldn’t afford to just let home prices rise rapidly, but economic growth and property curbs are trade-offs.”
The last attempt to quell residential price increases was in March, when former Premier Wen Jiabao in his last days in office before handing the reins to Li, stepped up a campaign begun in April 2010 to cool the real-estate market.
He ordered the central bank to raise down-payment requirements for second mortgages in cities with excessive cost gains and told cities facing “relatively large” pressure from rising housing prices to further tighten home-purchase limits.
Buyers haven’t been deterred. Home prices rose every month since March and in August climbed 8.6 percent from a year earlier, the most since December, SouFun Holdings Ltd. (SFUN), China’s biggest real estate website owner, said after a survey of 100 cities.
While stocks have recently surged on signs China’s economy is rebounding -- the Shanghai Composite Index has jumped 14 percent since a June 24 low, the biggest gainer among Asian benchmarks during the period after Hong Kong’s Hang Seng Index - - longer-term returns have been less impressive. Even after the rally, the Chinese stock gauge has declined 5.2 percent since the beginning of March and is down 32 percent since the end of 2009. Saving rates on bank deposits, meanwhile, are set at 3 percent annually, below this year’s government targeted inflation rate of 3.5 percent.
Real estate has become an alternative investment to preserve value, according to Henry Zhang, a San Francisco-based money manager at Matthews International Capital Management LLC, which oversees about $24 billion.
“Real estate is part of the financial system, which is relatively very much closed in China,” Zhang, who co-manages the firm’s China and China small companies strategies, said in a phone interview. As the money supply continues to grow, bank deposits lose money over time, he said. Many people meanwhile also don’t want to step into the stock market, which is at the initial stage, he said.
Regulators are seeking to restore confidence in China’s financial market by pledging to crack down on cases of insider trading, securities fraud and accounting flaws. The China Securities Regulatory Commission has stepped up enforcement of regulations since Chairman Xiao Gang took office in March by rebuking or punishing at least three brokerages for inadequate due diligence on initial public offerings. The CSRC is drafting rules to curb misconduct before ending an almost 10-month freeze on IPOs.
President Xi Jinping and his leadership team are preparing for a Communist Party meeting in November to discuss deepening reforms, according to a report on Aug. 27 from the state-run Xinhua News Agency.
A comprehensive list of reforms will be provided at the meeting and the changes will be “critically important for the economic outlook,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in a note last month.
Real estate has attracted “the lion’s share” of household investment in China, according to Standard Chartered Plc. It has made up more than 60 percent of household assets since 2008, compared with about 20 percent for cash deposits, Dorris Chen and David Yin, Hong Kong-based analysts at the bank, wrote in a report on July 4. That compares with 48 percent in the U.K., 32 percent in Japan and 26 percent in the U.S., the report said.
Standard Chartered estimated the value of China’s urban residential property market was 115 trillion yuan ($18.8 trillion) as of the end of 2012, dwarfing the 23 trillion yuan for the stock market and 26 trillion yuan for the bond market.
Homebuyer Zhou wanted to buy a property in 2008, the only time prices declined since China first allowed private home ownership in 1998. Even with prices tripling since 1998, Zhou remains confident that the couple’s purchase of the 60-square-meter (646-square-foot) Shanghai apartment in the Pudong district, their first property, will pay off.
“Home prices at least will not fall,” he said. The couple may sell and buy a bigger place when their baby son is older.
Housing prices in Shanghai will increase “rapidly” in the second half, backed by a 93 percent increase in the sales volume year-to-date and the impact of a free-trade zone the government is planning to set up in the city, Jack Gong, a Hong Kong-based property analyst at Orient Finance Holdings (H.K.) Ltd., said in an e-mailed note to clients today.
The government’s efforts to douse an overheated property market have also been frustrated by local governments in smaller cities, where prices have not kept pace with the gains in bigger hubs. Cities, especially smaller ones -- which got at least 21 percent of their revenue from selling land last year, according to UBS AG -- have been less inclined to enforce Beijing’s orders as economic growth slows.
Prices in Beijing and Shanghai both increased 14 percent in July as 69 of 70 cities tracked by the government climbed from a year earlier. The eastern city of Wenzhou was the only one to post a decline, while prices in the southern city of Haikou on Hainan Island rose 1 percent and gained 1.3 percent in the northern city of Tangshan from last year.
Wenzhou is easing restrictions to allow second-home purchases by some local residents, the official Xinhua News Agency reported on Aug. 15, citing a local housing bureau official. Yancheng in the eastern Jiangsu province suspended limits on housing prices as the supply of homes increased, the official People’s Daily newspaper reported on July 23. Home prices in Yancheng were unchanged this year to August, according to SouFun.
Traditionally, because of social welfare and pension systems that aren’t as advanced as in developed countries, the Chinese have felt safer buying real estate, said Liu Yuan, a Shanghai-based researcher at Centaline Property Agency Ltd., the country’s biggest real-estate brokerage.
“That’s why even if there are empty homes or low rental returns in some cities, home prices can still keep going up,” Liu said.
Wang Jianlin, China’s richest man and owner of closely held Dalian Wanda Group, the country’s biggest commercial land developer, is seeing an overheated real estate market.
The property market is “definitely” in a bubble, though it is “controllable, not big,” Wang said in an interview on Sept. 11 ahead of the World Economic Forum in Dalian, in the country’s northeast.
Michael Chang, a 33-year-old investment manager in Shanghai, doesn’t buy that argument. He spent 1 million yuan on a 20-square-meter, one-bedroom place in Beijing in August last year and 5 million yuan on a 130-square-meter unit in a Tishman Speyer Properties LP development in Shanghai this year without borrowing any money from banks, to expand his personal real estate portfolio. He wouldn’t say how many properties he owns.
Shanghai ranks sixth in a Savills Plc (SVS) report comparing 10 of the world’s costliest cities to buy an apartment that includes Hong Kong, New York and London. The survey, published in March, didn’t include Beijing.
“Let’s talk about bubbles when home prices in Beijing and Shanghai rank as the world’s top five most expensive cities,” said Chang, who believes home prices in Shanghai will rise 50 percent in the next five years. “You see home prices rally even when the curbs are in place, not to say when the bans are lifted.”
To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at firstname.lastname@example.org