China’s Real Estate Market Still Cause for Concern

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Oct. 21 – As China’s housing market continues to expand with its economy, concerns that the sector’s growth is being driven more by speculation than by actual housing demand are becoming more prevalent. A hot property market is prone to boom and bust cycles and some fear that China is on the tail end of such a boom.

One leading factor contributing to the current state of China’s real estate market is a lack of safe and reliable investment options for the country’s emerging middle and upper classes. China’s wealthy are investing in second or third properties while many citizens are trying to buy their first.

Policymakers in Beijing are struggling to contain the runaway market, and the recent surprise interest rate hike may help alleviate some of this stress. By raising interest rates, borrowing cash to invest in new construction projects is made more costly, and may help curb housing speculation and prices.

“The increase in the interest rate will increase speculators’ investment costs, dwarfing their demand,” Yang Hongxu, an analyst with the Shanghai-based E-House China Research and Development Institute, told People’s Daily. And yet, in practice, it’s difficult to tell whether the interest rate spike will have any effect at all.

“As most high-end buyers can afford more than 50 percent as the down payment, the 10 percent increase and interest rate hike means nothing to them,” said Wang Qiong, head of research at Savills in Beijing. The same can be said for larger real estate companies that can absorb higher borrowing costs relatively easily.

Moreover, the Chinese housing market is resilient. While developed economies entered a prolonged recession in the wake of the 2008 financial crisis, China’s property market recovered quickly and began to expand again. The problem however, that the current property market in China is skewed towards wealthier buyers and larger firms, remains and such an imbalance may pose a risk in the future.

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