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Sky-High House Prices Upset Buyers

A week ago, a friend called me from Shanghai to discuss his plan to buy a house.

Even the down payment on a personal housing mortgage loan could be a big financial burden on many young couples like my friend and his wife who have not worked very long but have to live on what they earn themselves.

However, what frustrates my friend most is the trend in the price of housing.

Both about 30, he and his wife are planing to have a child soon. Their eagerness to own a house is quite understandable.

"Housing prices are already very high, and I am just wondering if they will continue to rise," my friend said.

That is exactly the question most people in the country are repeatedly asking nowadays.

In some cities like Hangzhou, the capital of Zhejiang Province, average housing costs have already rocketed to more than 15 times a family's annual income.

Theoretically, such a price level should not be affordable in terms of local people's incomes.

But it seems that conventional wisdom is not holding in China's real estate market.

In spite of the central government's tough measures to cool down some overheated sectors in the national economy, the real estate market seems to be doing very well.

A real estate survey recently conducted in markets in 35 major cities indicates that China's housing prices in the second quarter this year grew by 10.4 per cent year-on-year. Price levels were 2.3 per cent higher than the first quarter of this year.

Shanghai, China's economic centre, certainly has not allowed itself to be outpaced by other cities.

In the second quarter, Shanghai's property prices grew 21.4 per cent year-on-year, according to a National Bureau of Statistics survey.

In the first half of this year, Shanghai's real estate authorities recorded 14.7 million square metres of new property sales, a rise of 15.3 per cent over the same period of last year.

The rapid price growth itself seems sufficient to justify further price hikes. And that worries and inspires potential house buyers like my friend.

The ongoing price hikes are persuading many that it is profitable to invest in the property market.

What is the supply-sider's view?

Domestic real-estate developers still keep asserting that housing prices will continue upward, but the prevailing panic among them over the coming ban on closed land deals might presage a different perspective.

The Ministry of Land and Resources issued an order to require all land for business purposes be transferred publicly after July 1, 2002. In the past two years, that order had never been earnestly implemented.

Now a new circular has made clear that there will be no exceptions as of August 31.

As that day of reckoning approaches, a sense of despair has become increasingly evident among property developers who have already been pinched for money as a result of the banking sector's credit squeeze.

It looks like really bad news for real estate developers who will no longer be able to capitalize on cheap land for their development projects.

Yet, it may also be bad news for house buyers, at least for the moment, since property developers claim the shrinking supply of cheap land will only reduce the supply of new houses, especially cheap ones, and send prices to new altitudes.

Should Chinese consumers just resign themselves to such skyrocketing house prices?

Memories are still fresh about the real estate sector managing to sabotage the central bank's effort to check breakneck expansion of real-estate-related loans with high-handed measures last year. At that time, the central bank expressed its deep worries about domestic banks' heavy exposure to excessive growth in housing prices and investment.

It remains a question if real estate developers will again escape unscathed from the new circular which will take effect in two weeks.

The moot question is bad news for my friend in Shanghai who has little choice but to buy a house soon.

Nevertheless, some of the arguments used to defend the current property market situation demand closer examination.

A recent article published in the China Economic Times listed 10 major "true lies" among common views about the real estate market. Among these "lies" are such statements as the real estate sector is an industry that fosters billionaires, the property market is already oversupplied, and most urban residents in China cannot afford to buy a house under current income levels.

Some of these apparent conclusions should really be reconsidered carefully when analyzing the property market.

However, what surprised me was the way the author refuted concepts and claims.

The author claimed that the central role of the property market is to foster middle-income groups by offering them a means to combine consumption with investment.

In other words, the author endorsed the property market status quo for meeting people's need for housing needs as well as providing a sound investment channel.

Is that true?

I am afraid that the majority of Chinese do not agree the current soaring house prices meet their housing demands.

After all, the country's per capita gross domestic product was just a shadow higher than US$1,000 a year. How can most people afford to pay for a house worth 200,000 yuan (US$24,000) in small and middle-sized cities and one worth at least 400,000 yuan (US$48,000) in major cities? Not that every family needs such an expensive house, but that is the typical price of new houses that real estate developers build.

As to the investment function of the property market, the author's arguments look more like a fallacy than recognition of the country's realistic situation.

Admittedly, Chinese people lack sound investment channels given the country's sluggish stock and bond markets.

Yet, just because people have few investment options does not mean what they have available is a good choice.

Actually, the country's present property market can hardly be deemed as safe place for private investments.

On the one hand, house prices in major cities are completely divorced from local people's average income levels. The ever-growing large income gap between the rich and poor indicates that after those few rich people have bought new houses, the market will be short of effective demand, sooner or later.

On the other hand, though current low interest rates have enabled a number of people to buy houses with bank loans, it is short-sighted to expect that such interest rates will remain this low for too long.

When interest rates for personal housing mortgages are raised, the risks of current high house prices will inevitably be exposed.

Besides, the collapse of property "bubbles" in many other economies also serves as a warning for private investors. It is unwise to believe that China will be an exception.

Of course, it will take a fairly long period for lofty house prices to gradually fall to a normal level.

Unfortunately, potential house buyers like my friend cannot wait for that long, especially when house prices just keep soaring.

Latest statistics show that China's housing prices rose 12.9 per cent year-on-year during the January to July period of this year, the highest since 1996.

The danger is that the more people who rush into the property market, the faster house prices rise.

Yet, later, that may mean the deeper the market will fall, and harsher the loss to all.

(China Daily August 24, 2004)

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