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IMF Survey: China: Property Bubble in the Making?

December 10, 2010

  • China's private property market in its infancy
  • Some major cities experiencing a bubble
  • Authorities taking precautionary measures against property price inflation

Many economists suggest China is in danger of hosting the next giant property bubble. With the world’s second largest economy acting as a key engine of global growth, the bursting of any such bubble would be a pop heard around the world.

China: Property Bubble in the Making?

Cleaning the windows of residences in Beijing. The Chinese capital is one of 35 cities to have seen surging property prices (photo: Corbis/Wilson Chu)

Property Prices

Ashvin Ahuja, an economist with the IMF, has made a study of property prices in the country. Speaking to IMF Survey online, Ahuja said he and his co-authors discovered worrying signs of property price inflation in some cities which had been fuelled by urbanization and investors pouring money into the property market.

IMF Survey online: How did the concept of private property market come about in China?

Ahuja: After China became the People’s Republic, the government was the sole provider of housing to its people. That is, until about 20 years ago. Then they tried to provide a legal foundation for private homeownership.

Ultimately, the government is still owner of the land, but it leases out this land for residential purposes. So you can live on that residential property and you have the right to sell it or rent it out for 70 years.

Then, 12—13 years ago, there was another milestone when the government started to encourage more people into buying and renting in the private market and discouraged state—owned enterprises from providing free or subsidized homes to their employees. So instead of providing subsidized housing, these enterprises gave housing benefits to their employees and then their employees would find housing in the private market.

IMF Survey online: So this is an incredibly new market? At most it’s a couple of decades old and, if anything, the true market really emerged in the last 10 years.

Ahuja: That’s right, over the last decade. The process of urbanization is the key driver of economic growth in China. Every year you have roughly 14—15 million new entrants into urban areas and so demand for homes is just enormous.

So they have to keep building, they have to keep accommodating enough people to make sure that prices don’t skyrocket every year, and the scale of that is just immense.

IMF Survey online: There has already been a steady increase in property prices in China, and this has worried a lot of observers. What’s been the scale of the rises and where have those price rises been concentrated?

Ahuja: Private house prices have been rising rather fast in China, about 100 percent every 5 years. So prices have doubled over the past 5 years in 35 cities in China. Price growth has been concentrated very much in larger or medium-sized cities, especially along the coast. For example, the most well-known examples would be Beijing, Shanghai, Shenzhen, or Tianjin and Hangzhou, for example.

IMF Survey online: So you looked at these 35 major cities and tried to conclude whether there was a property bubble or not. What were your findings?

Ahuja: Overall there is not a convincing sign that there’s a bubble that’s forming. But when you look at certain areas along the coast, and also some large cities inland, one could reasonably say that there is a bubble that’s inflating, particularly, in the mass market of Shanghai and Shenzhen.

IMF Survey online: The authorities in Beijing are deeply worried about the possibility of a property bubble and in recognition of this they passed measures earlier this year to try and dampen down any threat of a property bubble. What sort of measures did they take?

Ahuja: Basically they have tried to increase the stakes for aspiring homeowners. If you want to own a home, you have to come up with a higher down payment. Let’s say if you want a loan for $100, you have put up $30 for your first mortgage. If you want a second mortgage, you have to come up with $50 for example, as a down payment. And for the third mortgage, fourth mortgage, the down payment would be higher. Very recently they have discouraged and, I believe, managed to stop third mortgages.

IMF Survey online: If people are taking out third mortgages, that would seem to suggest that there are a lot of people out there with lots of money who are using property as an investment vehicle.

Ahuja: Definitely, and that’s been a key driver of housing prices over the past 10 years. And people have only experienced high growth, so it’s reasonable for them, without having experienced any downcycle, to think that the future will look bright. And when you expect high growth, people jump into the market.

The government has shown it’s worried and it has tried to clamp down on property price inflation. But I think the ultimate test is how the government can ensure a sustainable private housing market so that people can genuinely get housing services without having to suffer losses down the road.


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