China Not Facing Japan-Style Property Bubble, Housing Minister Says As Big City Prices Soar

SHANGHAI -- A sudden surge in property prices in big Chinese cities is not a bubble and will not lead to a market collapse similar to the one that hit Japan in the early 1990s, China’s housing minister said Tuesday.

In the month since the end of the Chinese new year holiday, prices in some big cities such as Beijing, Shanghai and Shenzhen are reported to have soared between 20 and 30 percent, after already seeing double digit growth last year. Prices in the southern city of Shenzhen led the way, rising 72 percent in the year to the end of last February.

Coming at a time when overall growth in the economy has slowed, and many smaller cities have seen falling prices and an inventory of millions of unsold new apartments, there have been warnings that China could end up like Japan, where a property bubble burst in 1990 wiped out the savings of millions of people.

But Chen Zhenggao, minister of Housing and Urban-Rural Development, told a news conference at China’s annual legislative session that it was “not appropriate” to compare the two — since the two countries were in “different stages of economic development and urbanization.”

Chen said he was confident in the “steady and healthy” development of the real estate sector, stressing that Beijing would use “differentiated” macro-economic policies “to control the situation.” In an apparent reference to gray market loans, which officials warned have boosted sales in recent weeks, he said China would both crack down on "illegal behavior to push up prices” — which he acknowledged had risen “too fast”— and would also “increase the supply of land and small-and-medium sized apartments” to provide more affordable housing.

Chen acknowledged that the inventory issue was “still serious” in smaller cities, and said the divergence between big cities and small ones was “severe” and “worsening,” and this would pose a significant challenge. But he said China’s economic fundamentals were “sound,” and the rapid pace of urbanization and enormous housing demand would prevent any crisis, according to the official Xinhua news agency.

Experts say China is effectively dealing with two separate, though linked, housing problems: the stock of unsold inventory, mainly in smaller cities, left over from the stimulus and credit boom unveiled after the 2008 financial crisis, totaled almost 740 million square meters (around 8 billion square feet) at the end of last month, and, Chen said, is still growing.

But recent measures aimed at stimulating spending to help sell off this inventory — including cuts in property taxes, bank lending rates and reserve requirements, and mortgage downpayment requirements — have all contributed to rising prices in big cities, where a shortage of properties, resulting from land sale controls imposed in recent years, along with greater availability of service and new economy jobs, has fueled demand. The end of a boom on China’s stock market — now down 40 percent from its peak last June — has also left many investors hoping for a rebound in the property market, which slowed significantly in 2013-14, and ready to speculate.

“The government hoped more bank lending would flow to smaller cities. What’s happened is the opposite, as banks just want to lend more to big cities,” Du Jinsong, head of Asia property research at Credit Suisse, told the South China Morning Post recently.

Some analysts have seen a positive side in data showing that new investment in property rose 3 percent in January and February compared to last year, while sales rose 49.2 percent, and new construction was up 13.7 percent after plunging last year. And the authorities last week said they were drawing up measures to prevent gray market lending, with some real estate agents already ordered to stop offering loans to fund required downpayments. The government has also said it will halt new land sales in many cities unless they make significant progress in selling off their existing inventory of homes.

And Chen reiterated an official plan to sell off some of the inventory in smaller cities to migrant workers from the countryside, saying that local governments were introducing preferential policies to help fund such sales. China has pledged to urbanize as many as 100 million rural citizens in the next five years — and analysts at HSBC have said that the unsold inventory could house as many as 90 million such people.

Some experts have questioned whether migrants can afford to buy expensive urban homes, even with subsidies, or even whether the unsold housing is in places where they can find jobs. But Julia Wang, China economist at HSBC, noted in a report this week that one city in western China has reduced its inventory from 21 percent to 14.6 percent in just eight months, thanks to subsidies and favorable welfare policies for migrant workers. And she said she expected "urbanization-related policies to place a key role in the de-stocking process in many third and fourth tier cities, which will help to maintain the recovery in housing investment" this year.

Not everyone is convinced, with some analysts saying it could take between three and five years to sell off the unsold housing stock, and that this policy will therefore do little to promote investment in real estate construction, previously a major engine of China's growth — though it could boost other sectors including home electronics and furnishing.

Many analysts do, however, say that fears of a nationwide property bubble are exaggerated, since the nation does have continuing demand, and relatively low levels of leverage. But with the property sector seen to have contributed some 30 percent of China's GDP over the past decade, the pressure to deal with the twin problems of excess inventory and unaffordable prices in big cities remains high.

Yao Yang, head of the National School of Development at Peking University, told the China Daily newspaper that the government should take advantage of falling prices in smaller cities to buy back unsold homes from developers, and either sell these off at subsidized prices, or use them for low cost rental homes for those on low incomes. Yet it remains to be seen whether the government is willing to invest the huge sums needed to help millions of rural migrants buy a piece of China's new urban dream.