By Stella Yifan Xie and Mike Bird
Even the coronavirus hasn't stopped the world's biggest asset
bubble from getting bigger.
After a brief pause during coronavirus lockdowns in February, a
Chinese property boom in some megacities that many thought was
unsustainable has resumed its relentless upward climb, with prices
rising higher and investors chasing deals despite millions of job
losses and other economic problems.
In March, 288 apartments in a new Shenzhen property development
sold out online in less than eight minutes. A few days later,
buyers snapped up more than 400 units in a new housing complex in
Suzhou. In Shanghai, apartment resales neared a record high in
April, by one estimate. One Saturday last month, nearly 9,000
people each put down a deposit of one million yuan ($141,302) to
qualify to buy apartments in a Shenzhen development.
"I barely had time for lunch on weekends in March" when the
market started bouncing back, said Zhao Wenhao, a Shanghai-based
agent at Lianjia, one of China's largest real-estate brokerage
firms. Many clients worry China's currency will depreciate in the
global economic slowdown, he said, driving even more money into
housing as a safe haven.
The resulting asset bubble, many economists say, now eclipses
the one in U.S. housing in the 2000s. At the peak of the U.S.
property boom, about $900 billion a year was being invested in
residential real estate. In the 12 months ending in June, about
$1.4 trillion was invested in Chinese housing. More was invested
last month in Chinese real estate than any other month on
record.
The total value of Chinese homes and developers' inventory hit
$52 trillion in 2019, according to Goldman Sachs Group Inc., twice
the size of the U.S. residential market and outstripping even the
entire U.S. bond market.
The market's coronavirus pause didn't last long. Urban home
prices in China were 4.9% higher in June than in the year-earlier
period. Year-to-date investment is up 1.9% in the first half of the
year, despite a huge drop in sales in February. On Thursday, China
said its overall economy grew by 3.2% in the three months ended
June 30.
China Evergrande, the country's biggest home builder, has raised
its sales target for the year by 23% from its January estimate,
after strong sales in March.
While the rapid housing-market recovery is good news on one
level for Beijing, it is also a reminder of behavior that has long
worried the central government, which has tried repeatedly to keep
property prices from getting out of control. Chinese President Xi
Jinping declared in 2017 that "houses are built to be lived in, not
for speculation," which became the guiding mantra for government
housing policy.
Getting people to take that message seriously, though, has been
hard. After a decade of rapid home-sales growth, fueled by
borrowing, China's household leverage ratio hit an all-time high of
57.7% in the first quarter. It was the biggest quarterly jump in
the ratio, which measures families' mortgage, consumer and other
debts relative to gross domestic product, since the first quarter
of 2010.
The central problem in China is that buyers have figured out the
government doesn't appear to be willing to let the market fall. If
home prices did drop significantly, it would wipe out most
citizens' primary source of wealth and potentially trigger
unrest.
That gives Chinese citizens who have enough money an incentive
to keep buying because they believe property in large cities will
remain the safest investment in China, regardless of the health of
the broader economy.
"Property has hijacked China's economy, so the government
wouldn't dare to push for a plunge in housing prices, even if
that's the most effective way to deflate the bubble," said Chen
Zhiyu, who works for an American retailer and is looking to
purchase a property in Shenzhen.
"You gotta follow the money," said the 37-year-old, adding that
he has raised his budget for spending on property since the
coronavirus pandemic helped drive up prices. "Whenever governments
start printing money, asset prices will go up. In the U.S., you
have a bull stock market, but in China, only housing prices will
keep surging."
Sales activity is also being driven by cash-strapped developers
and the local governments that sell them land. Both need to gin up
revenue to pay down debts or offset other problems, and are cooking
up more incentives to move properties.
No one is sure how Chinese officials can manage the problem
without destabilizing the broader economy. Even if the market stays
strong, it creates headaches for policy makers, who have had to
hold off on more aggressive economic stimulus this year -- which
some analysts say is needed -- partly because of fears it will
inflate housing further.
Polling conducted by the China Household Finance Survey, based
in the Southwestern University of Finance and Economics in Chengdu,
suggests the coronavirus pandemic has encouraged the kind of buying
Beijing worries about, with demand for property rising among people
who already own multiple properties, even as it has dropped among
those who don't yet own any.
That is a telltale sign of speculative investment, according to
Gan Li, a professor of economics at Texas A&M University and an
expert in Chinese household finance.
"Speculative demand is on the rise because [people] view housing
as a safer asset than the stock market or overseas assets," he
said. "They think it's guaranteed. Because of the pandemic they're
actually consuming less, and saving more. So they'll actually have
more money available to invest. That will create an even larger
housing problem."
About 21% of homes in urban China were vacant in 2017 -- a very
high proportion relative to international standards -- which
equated to 65 million empty units, according to the most recent
data from China Housing Finance Survey. Among families who owned
two properties, the vacancy rate reached 39.4%, and among those
that owned three or more, 48.2% were empty.
Rental yields -- the proportion of a property's value made
annually by renting it out -- are below 2% in major cities like
Beijing, Shanghai, Shenzhen and Chengdu, less than can be made
buying Chinese government bonds.
Even so, Shannon Bi, a 42-year-old English teacher, said the
pandemic has pushed her to invest in a second home in Shenzhen
sooner than she planned, because she worries about inflation. "You
have to invest the money somewhere, or it will only depreciate,"
she said.
Another buyer, Doris Tao, said she and her husband signed a
contract in early May on a second home in Shanghai. She hoped that
purchasing the apartment in a desirable school district would
increase her chances of enrolling her 3-year-old son in a good
elementary school.
"We've been paying close attention for months. Usually these
flats were snatched the minute they became available," said Ms.
Tao, 32, who decided to buy the day after visiting the apartment.
"We were so lucky to be able to buy this one. Our owner said she
got another offer in full cash the night we signed the
contract."
Part of what is so worrisome to some economists is the speed at
which China's property boom has grown so large, and its tendency to
keep climbing even during times of economic stress.
As recently as the 1990s, it was illegal under China's communist
system for most people to own homes. A State Council decision in
1998 abandoned the country's system of employer-allocated housing,
and homeownership took off.
By late last year, about 96% of China's urban households owned
at least one home, according to a Chinese central bank survey
released in April, far exceeding the 65% homeownership rate in the
U.S.
In some ways, the boom accomplished Beijing's goals. It has
boosted economic growth and created wealth for millions of
middle-class Chinese families. It also gave local governments,
which must turn over a major part of income-tax revenue to the
central government, additional revenue from land sales to
developers.
But the boom has taken investment dollars away from other
industries competing with real-estate borrowers for bank funding.
It also has saddled many families with debt. Globally, China
accounted for around 57% of the $11.6 trillion increase in
household borrowing over the decade through 2019, according to Bank
for International Settlements data. The U.S. accounted for about
19%.
Home prices in some Chinese cities have reached levels
comparable with some of the world's most expensive urban areas.
Average home prices across China reached 9.3 times average income
in 2018, according to the Chinese Academy of Social Sciences,
compared with 8.4 in San Francisco.
In Tianjin, a city of 15 million southeast of Beijing,
apartments in upscale areas sell for around $9,000 a square meter,
or about $836 a square foot, according to real-estate services
company Savills PLC. That is roughly the price an average buyer
would pay in some of the most expensive parts of London, even
though disposable incomes are seven times higher in London than
Tianjin.
In essence, urban Chinese have bet everything on their homes.
They now have nearly 78% of their wealth tied up in residential
property, versus 35% in the U.S., where more people invest in
stocks and pensions, according to a report by China Guangfa Bank
and Southwestern University of Finance and Economics.
When the coronavirus pandemic hit China, many economists and
property experts feared the moment of truth had arrived. Housing
sales plunged by 36% in the first two months of 2020 compared with
a year earlier, and many cash-strapped property firms were pushed
over the brink. As of June 5, more than 200 small developers had
filed for bankruptcy, according to state media.
Bigger developers and local governments rolled out incentives to
bring buyers back. Since February, at least 26 of 32 Chinese
provinces and regions have unveiled policies to boost their
property markets, according to Huatai Securities, including looser
down-payment requirements and subsidies for home purchases.
"While local governments are under pressure to prevent further
surges in housing prices, what scares them more is a sharp
decline," said Gao Fei, general manager at real-estate firm
Centaline Group in Tianjin. They can ill afford to let the market
go down. Income from land sales and related taxes on developers
accounted for 52.9% of local governments' revenue in 2019, a record
high, according to Shanghai Yiju Real Estate Research
Institute.
Yet, in a sign the central government disapproves of some of the
loosening measures, in at least 12 cities, including Jinan and
Guangzhou, documents detailing relaxed lending policies were
removed from local governments' official websites within days. One
city in Shandong province backed off plans to provide subsidies to
home buyers in mid-May, saying some parts of its plan "violate
relevant requirements from senior officials."
China Evergrande, whose enormous debts give it the largest
interest bill in the world among listed nonfinancial stocks,
according to Capital IQ data, offered discounts of 25% in February
and 22% in March. Country Garden Holdings, another major developer,
offered more than 17,000 new homes across China via social media
with discounts of up to 50%.
Among China's 34 largest developers, 27 reported a
year-over-year increase of sales volume in May, according to data
from China Real Estate Information Corporation.
More recently, incentives have been trimmed, though not
entirely. At one development in Shanghai in mid-May, CK Asset
Holdings offered prospective buyers a Huawei phone and vouchers of
20,000 to 40,000 yuan ($2,800 to $5,600) for future
apartment-management fees.
In other developments, no discounts were on offer, and would-be
buyers had to enter lotteries to access the smaller and cheaper
apartments. China Vanke Co. sold apartments in mid-May worth a
total of 148 million yuan ($20.8 million) within four hours online
in a live-streaming show hosted by an actress.
Yin Haiping, who runs a property consulting firm in Shenzhen,
said fear of losing out is driving more buyers to look now, with
home prices in some desirable areas up by at least 10% this
year.
Xu Xiaohua, a university lecturer in Tianjin who already owns a
property there, just bought another apartment this month in
Shenzhen. He paid 6.5 million yuan ($913,050) in cash in early May
for the 50-square-meter (538-square-foot) property after checking
out about a dozen apartments within a week.
He said he thinks most Chinese will park their wealth in real
estate during downturns. "The worse China's economy turns," he
said, "the higher property prices in places like Shenzhen will
climb."
--Bingyan Wang and
Zhou Wei
contributed to this article.
Write to Stella Yifan Xie at stella.xie@wsj.com and Mike Bird at
Mike.Bird@wsj.com
(END) Dow Jones Newswires
July 16, 2020 10:31 ET (14:31 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.