It has been a dozen years since the Chinese government passed housing reform permitting developers to build and sell homes to private citizens. Still, real estate remains in ultra-high demand throughout the Asian nation, as reported by Reuters after its four-day June summit, which took place simultaneously in London, Dubai, Singapore and New York.
Urban areas in particular are swelling with new inhabitants, especially those looking for affordable housing. Local governments and builders are supposed to finance 90% of the cost of new construction, but Reuters reports that they’re ill at ease with such a financial commitment in an uncertain real estate market. Property companies such as Vanke and Poly Real Estate say their profit margins are getting squeezed to single-digit percentage points.
So, what’s to be done? The Ministry of Finance has promised a 50 billion-yuan ($7.7 billion) bond issue on behalf of 11 local governments in June and July, with more to come by the end of the year. But that probably won’t be enough. Meng Xiaosu, advisory chairman of China National Real Estate Development Group, said during the summit that the central government should consider allowing real estate investment trusts and insurance funds in affordable housing.
Otherwise, how does the government expect to make its quota for the coming years? Already off target for 2011, Beijing’s stated goal is 36 million low- and middle-income homes over the next five years. That should cost upwards of 4 trillion yuan ($619 billion).
If China isn’t able to achieve its housing objectives, there could be a “hard landing” in the country’s near future. Hong Kong-based Credit Suisse economist Dong Tao told summit attendees that if that occurs, “We would expect fiscal stimulus to come to the rescue, instead of monetary easing. Providing funding to policy housing and speeding up infrastructure projects would be the easy options.”
But that raises another question: is China’s real estate market experiencing a bubble right now, and if so, does it risk being burst? Meng, who helped draft the country’s housing reform in 1998, left no doubt as to his opinion when he stated at the summit, “There is no bubble in any corner of the country.”
According to Meng, relentless demand, an increase in consumer inflation, and a dearth in low-cost housing will result in continued price increases through this year. Additionally, he believes that as the influx from rural areas to urban centres continues, home prices will rise accordingly over the next 20 to 30 years, at which point China’s urbanisation rate will hit 75% from its current 50%.
Still, while demand may remain high over the long term and keep the bubble floating harmlessly in the distance, the government has its work cut out for it to meet that demand under its own very tight deadlines.
Top image credit : Photobank gallery