China's Housing Market Nears U.S., Japan Bubble Levels: Chart of the Day

China’s property market may be heading into a bubble as the economy’s reliance on real estate reaches a level close to the housing peaks in the U.S. and Japan, according to Citigroup Inc.

The CHART OF THE DAY shows investment in residential property accounted for 6.1 percent of China’s gross domestic product last year, the same level as the record in the U.S. in 2005 that was followed by the subprime crisis, said Shen Minggao, Citigroup’s China research head. It’s also about 2 percentage points away from Japan’s 1970s housing boom, he said.

“China’s property market is entering into a bubble stage,” Shen said in a phone interview. “It’s evident that property prices are no longer sustainable once the residential investments achieve above 8 percent of nominal GDP, and China may not be an exception.”

A 10 percent drop in China’s property investment translates to a 1 percentage point decline in nominal GDP, Shen said. Adding investments indirectly related to the real estate industry, nominal GDP will fall 2 percentage points to 2.5 percentage points, he said.

China’s property prices rose for 19th month in December, climbing 6.4 percent from a year earlier. The government last week increased the minimum down-payment for second-home purchases, told local governments to set price targets on new properties, and introduced taxes for homes in Shanghai and Chongqing. The measures followed two interest rate increases in the past four months and a ban on third mortgages.

Chinese Premier Wen Jiabao also said Jan. 18 the government will “resolutely” implement controls on the real estate market in the first quarter. China’s property prices will fluctuate within a 10 percent range this year, Shen said, adding that the country “may only avoid the bubble burst if current property tightening is effective.”

--Bonnie Cao and Jay Wang. Editors: Linus Chua

To contact Bloomberg News staff for this story: Bonnie Cao in Shanghai at +86-21-6104-3035 or bcao4@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

Jan. 28 (Bloomberg) -- China approved property tax trials on some homes in Shanghai and Chongqing, adding to measures announced earlier this week in its campaign to curb real-estate speculation and asset bubbles. Both cities will begin trials for the levy today, following the government’s Jan. 26 announcement it will raise the minimum down-payment for second-home purchases and ask local authorities to set price targets for new properties. Property prices rose for a 19th month in December, even after the government suspended mortgages for third-home purchases and restricted loans to developers. Stephen Engle reports from Chongqing for Bloomberg Television. (Source: Bloomberg)