Housing bubble threatens China's boom

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The young couple had just finished another disappointing round of house hunting when Sun Chun turned to his wife with more bad news. Their real-estate agent had called to say that an apartment they liked had been sold, but not before the price jumped dramatically at the last instant.

"Are they crazy? How come the price rose so suddenly?" Mr. Sun asked as his wife's eyes widened in disbelief. "Right now, it is still us who are selecting the house. But it won't be long before it is the house selecting us."

The trials of a young couple trying to find affordable housing may not sound like gripping television fare, but with real-estate prices spiralling out of control in China, Snail House was a hit when it went on the air in July. The gritty plot - revolving around two sisters trying to establish themselves in a fictional city that looks a lot like Shanghai - hit so close to the bone that Chinese authorities cancelled the show after only 10 episodes. It quickly found a new life online, where some 30 million people have viewed it.

The runaway popularity of the show highlights a dark undercurrent to what has otherwise been a successful year for the Chinese economy.

While the world marvels at China's ability to maintain an 8-per-cent growth rate amid a global recession, many ordinary Chinese don't see that translating into the better standards of living they envisioned. Economists, meanwhile, worry that speculation-driven investment is creating an expanding Dubai-style bubble in China's real-estate market.

The high cost of urban housing has become public issue No. 1 in the world's most populous country in recent months. A recent university graduate recently became an Internet celebrity after pictures were published online of the home she had made for herself in the washroom of the office building where she works. An online poll of more than 10,000 people on the Sina.com Web portal found that 47 per cent of respondents would have an extramarital affair if it would help them get a big-city apartment.

Despite a building boom in recent years, real-estate prices in China's crowded cities are increasingly out of reach for most ordinary Chinese. Average housing prices recently hit $2,200 (U.S.) per square metre in Beijing, one-third of the average annual income in the capital, and developers have been reporting record profits even as newly built skyscrapers and vast shopping malls sit partially or completely vacant around the city.

According to one report by a government think tank, half of the property purchases in Beijing are made by people who live outside the city, and 20 per cent are for investment purposes only, with the buyer having no intention of actually using the property. In Shanghai, prices are even higher, having shot up 60 per cent since last year.

"In Beijing, about 90 per cent of homes are hardly affordable to ordinary people," said Yi Xianrong, a member of the Institute of Finance and Banking at the China Academy of Social Sciences. "If the government doesn't adjust its policies, these financial problems will definitely cause social problems. There will be an earthquake in society."

Prof. Yi says the government's otherwise successful $586-billion stimulus program has caused "not just one bubble, but many bubbles" in China's real-estate market.

Last fall, as diving export numbers led to factory closings and mass layoffs, Beijing ordered banks to intervene by massively increasing lending. Loans for real-estate developments jumped 121 per cent in the first six months of this year compared with the same period in 2008, while the amount of land under development rose 15.8 per cent. The total area being developed forms a construction site larger than New York.

"They're different places and different environments, but Dubai and China have one thing in common: Both are using bank money to hype the prices of real estate and drive them higher," Prof. Yi said. "Dubai's problems are actually not as serious as those of Beijing and Shanghai. If the government doesn't see this clearly, we're going to have a very big problem."

Economists say the worst offenders are often government departments, which raise cash for themselves by selling land to corporations they control at sky-high prices.

One recent example in Shunyi, a posh suburb on the outskirts of Beijing, saw a residential plot sold for a record $4,300 per square metre. The buyer happened to be a development company owned by the local government, but that didn't stop Shunyi county from recording $740-million in revenue from the sale.

Although few ordinary Chinese are exposed to the real-estate market - most keep their savings in bank accounts - some look at China's economy and see parallels to Japan's just before the stock and property markets there collapsed 20 years ago.

The problem is dramatic enough that the usually tame Chinese media have weighed in with a rash of articles uncharacteristically critical of government policy. One pointed out that house prices in Beijing are now higher than in Dubai, despite the fact the latter's population is far wealthier on a per-capita basis. Another said the government had "little excuse" for not taking action to control speculation in the real-estate market.

"The soaring price of property has become a serious national issue and the economic distortions it gives rise to are affecting the everyday life of the majority," read a recent editorial in the Global Times, a paper closely affiliated with the ruling Communist Party.

However, some say the government is unlikely to take measures - such as raising interest rates or tightening lending policies - to curb runaway prices because it sees unemployment as a far bigger danger than a real-estate bubble. The fear that factory closings would lead to unrest among millions of laid-off migrant labourers was cited as one reason that Beijing acted as aggressively as it did in introducing its massive economic stimulus last fall. Now, the same ultra-loose fiscal policy blamed for rising property prices has fuelled a construction boom that is keeping millions of workers employed.

"[The government is]stuck in a tough position. On one hand, they're worried about non-performing loans and bubbles in real estate and the stock market. On the other hand, they're worried about rising unemployment," said Michael Pettis, a professor of finance at Beijing University. "The tools that they have to solve one problem are likely to make the other problem worse."