On the whole, the real estate market "apparently cooled" in October following targeted measures rolled out in first-tier and some second-tier cities, China's National Bureau of Statistics said in a statement. Local governments in at least 21 cities have been introducing property curbs, such as requiring larger down-payments and limiting purchases of multiple dwellings in a bid to cool prices.
The impact of the curbs may be short-lived as regulators have shown no signs of tightening on the monetary front, according to analysts from UBS Group AG and Bank of Communications Co.
"The curbs will show their effect in the initial two-to-three months, but in the longer term idle capital will still likely flow to property in the largest hubs as 'safe-heaven' assets," said Xia Dan, a Shanghai-based analyst at Bank of Communications. The impact of the curbs will gradually abate as "liquidity is so abundant in a credit binge," she said.
In the first three quarters of 2016, according to data compiled by Bloomberg, average prices for new homes rose 30 per cent in tier-one cities such as Shanghai, and 13 per cent in smaller, tier-two cities.
The boom traces to 2014, when the People's Bank of China began easing lending requirements and cutting interest rates. The China Securities Regulatory Commission also lifted restrictions on bond and stock sales by developers, helping them raise money for new projects.
Soon, properties were selling for ever-larger sums in government land auctions. By June 2016, China's 196 listed developers had incurred 3 trillion yuan in debt, up from 1.3 trillion three years before. In many cities, the price per square meter for undeveloped land has risen higher than for existing apartments on a comparable plot next door, a situation the Chinese describe as "flour more expensive than bread."
Officials have been trying to end the exuberance without harming the economy, a task made more difficult by the property fever's uneven spread. Many smaller municipalities rely on property sales to plug holes in their budgets, giving them an incentive to increase the supply of developable land. So while premier cities have seen tight supply and high prices, smaller ones have too many apartments and not enough buyers.
"Usually the market moves in tandem," said Patrick Wong, an analyst with Bloomberg Intelligence in Hong Kong. "It's quite dramatic to see tier-one cities need tightening and lower-tier cities need relaxation."
The central government is also promising to crack down on rogue players: In early October, the Ministry of Housing and Urban-Rural Development said it was investigating 45 developers and agents for allegedly engaging in false advertising and other unlawful activities promoting speculation.
Some cities, including Shenzhen and Nanjing, have also tightened the divorce loophole.
There's some risk that such measures will succeed too well. In a Sept. 28 report by Deutsche Bank, economists Zhiwei Zhang and Li Zeng estimated that a 10 per cent decline in housing prices nationwide would lead to 243 billion yuan in losses for developers.
Consumer spending could fall, too, since people have taken on more debt to buy property. Mortgages accounted for 23 per cent of new loans in 2014, compared with 35 per cent in the first half of 2016 and 71 per cent in July and August.
"The potential macro risk is alarming," Zhang and Zeng wrote.
That's not to say China is headed for a meltdown. Banks haven't resorted to the subprime lending that proliferated in the U.S. before the Great Recession, and despite the recent rise in mortgage loans, China isn't taking on vast levels of household debt - only 45 per cent of gross domestic product, according to HSBC Holdings Plc, compared with 66 per cent in Japan and 89 per cent in South Korea.
And despite the relaxation in 2014 of rules preventing sales of mortgage-backed securities, which also exacerbated the U.S. crisis, Chinese investors hold only 72.8 billion yuan worth, according to data from Chinabond and the Shanghai Clearing House.
In 2017, the Communist Party will hold its quinquennial congress, and with GDP growing 6.7 per cent so far this year, its slowest pace since 1990, a property bust would be especially unwelcome.
"The only thing I know is that buying property won't turn out to be a loss," said Cai, citing two decades of rising prices as proof. "From several thousand yuan a square meter to more than 100,000 yuan. Did it ever fall? Nope."
- Bloomberg
