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China Money Funneled to Far-Flung Homes Flags Bubble Trouble

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  • Overheating risks rise in housing markets of smaller cities
  • Buyers locked out of home cities seize opportunities elsewhere

When a 59-year-old accountant in Shanghai wanted to invest for her looming retirement, she bought two cheap apartments -- on the other side of the country.

“When friends told me about a chance to buy properties in Xishuangbanna, I thought ‘why not?”’ said Yuan Junxi, talking of the steamy, subtropical region in Yunnan province, bordering Laos and Myanmar. “No buying limits; cheap, easy mortgages; and maybe property prices will jump over there too.”

Buyers such as Yuan, a mother-of-one who borrowed to help fund her purchases of 280,000 yuan ($41,000) each in the city of Jinghong last month, are spreading the risk of bubbles to ever-smaller places in China’s provinces, after a crackdown by the government took some of the froth out of the property market over the past 14 months.

The spreading demand among ordinary citizens for homes in smaller cities underscores the enormity of the task ahead for China’s leaders: rein in the market without tanking the economy. The risk that China could fail to keep that tricky balance is at the core of the long-term financial concerns for China that triggered a downgrade by Moody’s Investors Service on May 24.

“The current surge in sales in third- and fourth-tier cities is fueled largely by expectations of a future price rally, not by asset yields, and that’s exactly a sign of a bubble,” said Zhao Yang, Hong Kong-based chief China economist at Nomura Holdings Inc. The “biggest risk” is a downturn in those cities triggering an abrupt national sales slump, Zhao said.

Read about China’s first Moody’s downgrade since 1989 here

When Beijing resident Fay Qu, 34, found herself locked out of local property purchases because of the city’s curbs, she and her friends instead together bought a million-yuan apartment late last year in the third-tier coastal city of Zhongshan in Guangdong province -- 1,400 miles away -- beating restrictions that the local authorities rolled out in March.

“We were lucky,” she said. “It’s much better than depositing money in the bank.”

Cooling measures pulled down price gains in cities such as Beijing, where the restrictions are harshest, Shanghai, and Shenzhen.

That’s not the case in smaller places like Tangshan, best known for a 1976 earthquake, or Bengbu, a city in the poorer province of Anhui. Both had a 2.2 percent month-on-month gain in April, the biggest increase since at least 2011. In Xishuangbanna’s Jinghong -- too small to feature in the most-watched statistics bureau releases -- prices rose 26 percent in the 12 months ended March, according to city data cited by the private property website

Investors’ Bets

Strength in property markets in tier-3 and tier-4 cities is partly offsetting a worsening in bigger cities, Citigroup Inc. analyst Oscar Choi, who’s based in Hong Kong, wrote in a note. A Bloomberg Intelligence index tracking the shares of 22 large Chinese developers is up 37 percent this year; it fell as much as 1.9 percent on Friday.

To rein in a surge in prices, China’s leaders adopted a targeted strategy to cool buyer demand in specific hubs, instead of a one-size-fits-all approach. That meant urging stricter restrictions in cities such as Beijing and Shenzhen, which had seen the biggest growth, while leaving local governments in smaller centers to take the steam out of markets as they saw fit. 

The trick, as cooling measures spread, is to avoid weighing too heavily on the nation’s economic expansion.

National home sales growth slowed in April to the weakest annual pace in more than two years. During 2016, sales swung month by month as curbs intensified and buyers channeled money into new cities or found ways to bypass restrictions.

Construction Slowdown

Analysts at JPMorgan Chase & Co. this month forecast falling sales and weaker growth in real-estate investment over the rest of the year, with the government likely to succeed in keeping national housing prices “stable.” Bloomberg Intelligence economists Fielding Chen and Tom Orlik estimate that a likely slowdown in construction will shave 0.8 percentage points off the nation’s economic growth rate.

If a slowdown bites, the authorities may find themselves forced to choose between hitting the 6.5 percent growth target and letting the restrictions on property ease.

For now, local authorities have boosted down-payment requirements, restricted purchases by non-residents, and capped the number of dwellings that a household can own. Since March, at least 26 cities have imposed resale lock-up periods, with Hebei’s Baoding city slapping a decade-long ban on some homes, according to Shanghai-based Tospur Real Estate Consulting Co.

While President Xi Jinping and his officials keep repeating the slogan that “houses are built to be inhabited, not for speculation,” the popular faith in real estate as an investment is undimmed.

— With assistance by Emma Dong, Miao Han, Jeanny Yu, Hannah Dormido, and Moxy Ying

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