Is China’s residential property market bubbling up?

Average new home prices in 70 major cities went up 3.6% in February from a year ago, a significant rise from January’s 2.5%, according to Reuters calculations based on data released by the National Statistics Bureau (NBS). On top of that, 32 of the 70 major cities tracked by the NBS saw annual price gains, up from 25 cities in January.

The drastic increase is thanks to huge demand in big cities, but smaller cities with weak growth and risks of overheating are threatening an already slowing economy. The gap is widening between the surging real estate prices in bigger cities and the depressed market in smaller cities suffering from oversupply.

Rosealea Yao, an economist at Gavekal Dragonomics in Beijing, says that the (Chinese) government’s all-out encouragement of housing sales seems to be working, but at the cost of skyrocketing prices in big cities. The surge in pricing in these cities isn’t sustainable and would increase uncertainties and instability in the overall housing market.

Prices of residential properties in first-tier cities, including Shenzhen, Shanghai and Beijing, have seen a surge of 56.9%, 20.6% and 12.9% respectively. Many new families have difficulty buying a home in these cities as the prices are too expensive. A slowing economy has also meant most jobs are in the biggest cities, drawing more people into these places and feeding the insatiable demand for homes in big cities. It’s a vicious cycle.

Shenzhen, in southeastern China, is a modern metropolis that links Hong Kong to China’s mainland.

Shenzhen, in southeastern China, is a modern metropolis that links Hong Kong to China’s mainland.

In stark contrast, most third-tier cities still saw price drops in February, though the declines had eased from the previous month. These smaller cities are seeing a glut of unsold houses which are weighing on prices despite government measures and increased lending. (In February, the People’s Bank of China had slashed minimum down payments for property to 20 per cent in most cities, the lowest in eight years. That and other similar measures have boosted demand and pushed up home prices.)

With the broader economy decelerating amid weak exports, factory overcapacity, slowing investment and high debt levels, authorities are hoping the property market will help stabilise growth. However, signs that some places may be overheating even as prices remain depressed in smaller cities complicate matters for policymakers. China’s housing Minister Chen Zhenggao acknowledged on Tuesday that price divergence in China’s big and small cities poses a challenge for housing market policy controls, saying that it was vital that home prices were stablised in tier one, and some tier two, cities.

Given that the real estate industry and related investment activities account for 15% of gross domestic product, China cannot afford a housing market crash in its big cities.

Asia Times Online