Tensions lurk for Chinese property

Take a train from Beijing and after a few hours, each city you pass through becomes indistinguishable from the last.

Fact Box: China's bubble in numbers

3m Typical price in yuan of a two-bedroom flat in Beijing

31 Number of cities, out of a total of 70 analysed, in which property prices fell or were stable last month.

1% Average price increase last month, from June, in the 39 major Chinese cities in which prices increased.

13m Number of Chinese rural dwellers moving to cities each year.

They all show the same pattern of frenzied building of high-rise apartment blocks on the outskirts, leading into a modern if often slightly dreary centre, before another stretch of new apartments appears as the train nears the outskirts.

Orange cranes stand by to construct the endless rows of tower blocks, some of which are still just dark shells, while others are completed and awaiting residents.

As economic chatter in other parts of the world remains preoccupied with debt crises, China's construction boom continues at a breathtaking pace amid near double-digit economic growth.

Such has been the pace of development, fuelled by a rise in prices, which went up threefold between 2005 and 2009, that many believe the sector is set for a heavy landing, perhaps repeating the difficulties it suffered in late 2008. Then, large cities such as Shanghai and Guangzhou saw sharp falls in property prices, and rates of construction fell steeply too.

Fanning fears of another slowdown, there are now cities such as Ordos in the province of Inner Mongolia where vast swathes of properties lie empty, with developers apparently having thrown up apartment blocks with abandon.

It is, says Stephen Joske, director of the Economist Intelligence Unit's China Regional Forecasting Service, "an urbanisation that got ahead of itself". He adds that vacancy rates in many of the areas of urban China he has studied are above 20 per cent.

"In China it's in a serious bubble, [but] it's really hard to predict when this bubble will burst," says Chun Xia, an assistant professor at the University of Hong Kong.

A report by the French bank Societe Generale, titled Chinese Construction Bubble - Preparing for a Potential Burst, said data such as the number of square metres of new property built in the past year, plus cement consumption, indicated construction was "running ahead of its development curve".

"Thus, Chinese construction needs to slow down to avoid a larger construction bubble with many under-performing projects," the report states. If there was a major slump, Mr Chun says "the whole economy will be affected negatively to a great extent", with construction said to make up a quarter of the country's economic activity.

For more than a year, Beijing has introduced various measures to try to cool the market, as it also grapples with concerns about overheating in the economy as a whole.

Restrictions on lending and on multiple house purchases, and some property taxes, have been rolled out, and state media has reported that such restrictions will be introduced into more of China's second and third-tier cities.

Certainly the initiatives have helped to keep a lid on price rises, with the most recent figures, for last month, indicating that out of 70 cities surveyed, prices remained flat or fell in almost half. In Beijing and Shanghai, prices were static.

Yet, says Mr Joske, building rates "are still going too fast". Despite these signs of overheating, Mr Joske says there are factors that make a slump less likely.

In particular, China is in the midst of a period of urbanisation unprecedented in world history, and that means there will be sustained demand for urban properties.

Currently, about half of the country's population of 1.3 billion lives in cities, and about 13 million people are moving to urban areas each year in search of job opportunities.

While this figure is predicted to drop over the coming decade, the ranks of city dwellers are still expected to be swelling by 10 million a year in 2020. Another reason not to get too concerned is that about 30 per cent of buyers are paying cash.

"That suggests that the bursting of that bubble will not be as bad, will not be as damaging as we have seen in the countries where the homeowners get into negative equity," says Danny Quah, a professor at the London School of Economics.

Mr Joske believes there will, however, be a correction of some sort, and that it could begin by the end of this year. With the market having slowed as a result of government restrictions, there is a risk some developers will use up their cash reserves and begin "dumping" properties on to the market. But he does not believe the correction is likely to be too dramatic, and it may be construction rates, rather than prices, that fall.

"The correction that has to happen is in physical investment in housing. This has to come down - they have to build less," he says.

"If there's a slowdown, China doesn't have to have another stimulus package, it just has to relax some of the controls and the property market will kick start."

Whatever happens in the next couple of years, the longer-term outlook remains positive, Dr Chun says. "In the short term it's trouble, but I still believe in the long term the Chinese economy will be in good shape."

dbardsley@thenational.ae