How likely is the China property bubble?

Buying properties in China could be risky business though the authorities are beginning to plug loopholes in the system such as property agencies acting as intermediaries in housing transactions. When your property agent or agency in China offers you a loan for your down payment, know that it is illegal.

beijing-tongzhouPhoto credit: Beijing Tongzhou integrated development by Perennial Real Estate.

As the population shift from countryside to cities, first- and second-tier cities are becoming more crowded and home prices are sky-rocketing. Money stimulus policies which began in November 2014 may have contributed to the boom, especially in cities such as Beijing, Shanghai and Shenzhen. Home prices in Shenzhen for example, have climbed 52 per cent in a year. The Chinese government has however been implementing cooling measures to curb or at the very least slow down the sharp rise and are positive that a property bubble similar to that in Japan in the 1980s will not happen.

While the top-tier cities are enjoying the benefits of the nationwide population shift and influx of foreign investment monies, smaller third- and fourth-tier cities are suffering from a pressurising load of unsold inventory. Reports of ‘ghost towns’ were not uncommon from more than a year ago and stock has only increased since then. In fact, 70 per cent of the 739 million sq meters of China’s home inventory comes from these smaller cities. The lack of consumer interest in these cities could mean a downward spiral for the property markets in these lower-tier cities as the potential for value appreciation becomes narrower. Despite the government’s projected minimum annual growth of 6.5 per cent from now till 2020, market regulations may have to be tweaked to boost specific sectors in order to shine the spotlight on more than just the top-tier cities.