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Forever blowing bubbles in China

REUTERS
Published : Mar 5, 2016, 12:23 am IST
Updated : Mar 5, 2016, 12:23 am IST

Frenzied property buying in Shanghai has set alarm bells ringing that a new bubble is forming, just months after China’s frothy stock markets crashed, raising fears about a replay of the real estate b

Frenzied property buying in Shanghai has set alarm bells ringing that a new bubble is forming, just months after China’s frothy stock markets crashed, raising fears about a replay of the real estate bust that has hit the country’s growth since 2012. Home prices in the city, China’s biggest financial hub, climbed 3.6 per cent in February from the previous month, according to a survey by CRIC, extending the 17.5 per cent annual gain it recorded in January, which was seven times faster than the country as a whole.

The property revival has coincided with investors' abrupt loss of faith in China’s share markets, which had soared 150 per cent in the year to mid-2015, only to give up fourth fifths of those gains since the summer.

“The (property) market seems crazy again. I have no idea why it’s crazy, but it should be the right time to buy,” said Wang Zhongcai, a 50-year-old clerk, who was queuing, among many others, to register ownership of a small investment apartment he had bought.

From 2005 to 2011, property prices in China soared, buoyed by ready credit, migration into the cities, and government stimulus measures after the global financial crisis.

As developers poured money into new builds and unrelated companies set up property arms, residential housing development as a share of economic output tripled in a decade, until government measures to cool the market ended the frenzy.

Chastened by the impact of that bust, which left a huge stock of unsold apartments across China and hammered industries supplying construction materials, Beijing has for the last 18 months been trying to soften the blow, cutting interest rates, downpayment requirements and property transaction taxes.

The government’s principal goal was not to help the bigger cities but the smaller ones where unfinished, abandoned developments remain a very visible reminder of the market failure. But the big cities appear to be drawing the lion’s share of new investment — and warnings from economists.

“In first-tier (cities) the prices are certainly rising too fast. Every time when there are control policies, most resources focus on first tier,” said Lan Shen, Standard Chartered’s China economist in Beijing. “Going forward the policies will be more aiming at the lower tiers,” Mr Lan said.

Location: China, Shanghai