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Housing markets - Double bubble trouble

China s property prices appear to be falling again

Mar 22nd 2014 | HONG KONG | From the print edition

CAN bubbles ever pop twice? In late 2009 the world began to worry about a

Chinese property bubble, symbolised by Ordos, a newly built city, bereft of

citizens, in Inner Mongolia. In the spring of 2010 China s government broadened

its curbs on multiple home purchases and mortgage borrowing. The following

spring, prices in nine big cities fell at last, according to one widely watched

index. The Great Property Bubble Of China May Be Popping declared the Wall

Street Journal in June of that year.

This week the same newspaper cited compelling signs the Chinese property boom

is over, noting that Cassandras have been predicting a crash for years. (The

Cassandra of Greek myth could tell the future but was never believed. For China

s property Cassandras, things are the other way round: their direst

predictions are often believed, but have yet to come true.)

Bubbles often go on longer than expected. This newspaper warned about America s

internet and housing bubbles years before they burst. What is unusual about

China s bubble is not its persistence but its prevarication. It seems to be

bursting for a second time. Property prices did peak in 2011, as the Journal

noted. But the following year, they started to rise again.

Prices are still rising in 69 of the 70 cities tracked by the official

statistics (Wenzhou in Zhejiang province is the exception). But residential

sales fell by 5% in the first two months of the year, compared with a year

earlier. And other statistics paint a darker picture, points out Nomura, a

bank, which believes that property now poses a systemic risk to China s

economy.

Nomura (among others) calculates an alternative property-price index by

dividing the official figures for the value of housing sold nationwide (599

billion yuan, or $96 billion, in the first two months of 2014) by the

floorspace sold (94m square metres). That suggests the price per square metre

was about 6,400 yuan. By this (volatile) measure, prices fell by 3.8% compared

with a year earlier (see chart). That has not happened since February 2012.

Falling prices would be a natural outcome of China s frenetic pace of

homebuilding. China now has almost as much floorspace per person as Italy

enjoyed in 2009, Nomura calculates. GK Dragonomics, a consultancy, thinks China

needs to build roughly 10m homes a year to keep up with the growing size and

aspirations of the urban population (see article). Until 2011, China s annual

homebuilding was below that figure. In 2012, it surpassed it.

In most countries, that would be reported as good news. A rapid expansion of

the housing stock means fewer people living in the boondocks or in urban

discomfort. In China, however, this building frenzy is seen as an economic

threat, not a triumph. One fear is that China s developers are building houses

for the wrong people (speculators) in the wrong places (backwaters). Instead of

accommodating China s overcrowded urban masses, too many houses stand empty,

serving as stores of value for people dissatisfied with bank deposits and

distrustful of the stockmarket. Another fear is that if homebuilding falls

sharply, China may struggle to shift labour and capital quickly enough to avoid

an abrupt slowdown in the overall economy.

But the first fear should allay the second. China s building boom has left some

parts of the country with too much floorspace and other parts with too little.

Nearly half of all migrant workers still live in dormitories or on worksites.

Where housing is oversupplied, prices will have to fall, inflicting losses on

homeowners. But where housing needs remain unmet, scope remains for further

construction to fill the gap. For example, the government has said it will

spend more than 1 trillion yuan this year renovating shoddy housing. This will

help keep homebuilders busy.

Realignment of the industry will be painful for local developers that cannot

diversify across regions. These smaller firms have also suffered

disproportionately from the government s efforts to curb bank lending to the

sector. Cut off from banks, they have borrowed at punishing rates from less

regulated trust companies instead. Some went further. The biggest shareholder

of Zhejiang Xingrun, a property firm, was recently detained for illegal

fund-raising , local reports say. It has debts of 3.5 billion yuan ($565m) that

it seems unable to repay. It would not be the first property default in China.

But it would be one of the biggest.

Because China has misallocated housing, some parts of the country remain

overcrowded while others remain empty. A bubble is always bursting somewhere,

even as another inflates elsewhere. In China s patchwork housing market, the

Cassandras are never right everywhere but they are often right somewhere.