Analysis - Property risk reigniting as China economy turns corner

BEIJING Fri Jan 18, 2013 7:09am GMT

A worker stands amongst scaffolding on a construction site for a new residential building in central Beijing September 21, 2012. REUTERS/David Gray

A worker stands amongst scaffolding on a construction site for a new residential building in central Beijing September 21, 2012.

Credit: Reuters/David Gray

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BEIJING (Reuters) - Business is booming in Beijing's real estate offices -- good news for property agents like Zhang Huanhuan, but a headache for China's policymakers as worries resurface about the sustainability of investment in the sector.

"We've got off to a flying start in 2013 -- transactions are picking up, so are prices," said Zhang, a saleswoman at an outlet of Maitian Real Estate Agency Co. in the capital.

Recent sales included six high-end apartments at a condominium in Beijing's Dongzhimen area, a neighbourhood favoured by the city's expatriates, she said.

Government data on Friday is likely to show China's annual economic growth rebounded to 7.8 percent in the fourth-quarter of 2012 from 7.4 percent in the third, snapping seven straight quarters of weaker expansion.

Chinese leaders may be reassured that the economy has finally turned the corner -- even though the recovery is likely to be tepid -- but they face a delicate policy balance amid worrying signs of a renewed property frenzy.

The home buying spree has not been confined to Beijing.

New home prices in 70 major Chinese cities rose 0.3 percent in November from October -- the fourth month in the last five to show a rise -- a modest increase but the most, nonetheless, in 19 months, official data showed.

"The first phase of 44 suites of our project launched last week has almost sold out, with only 6 suites left," said a salesman surnamed Qu, marketing a development by Wharf Holdings (0004.HK) in Hang, capital of eastern province of Zhejiang.

"We will launch the second phase of over 300 suites and so far about 2,000 prospective buyers had registered buying interest for our project."

UNLEASHED DEMAND

The new leaders of the ruling Communist Party have promised to keep pro-growth policies in place in 2013, amid expectations they will speed up migration to China's burgeoning cities by overhauling the rigid household registration, or "hukou", system, which could unleash fresh housing demand.

While reaffirming existing property cooling policies to fend off speculation, they may be tolerating a modest pick-up in the property sector to aid an economic recovery still heavily reliant on investment, analysts say.

Without stability, Xi Jinping and Li Keqiang, who are due to take over as President and Premier, respectively, in March, have no chance of delivering a slew of reforms they say are needed now to tackle the financial, industrial and income imbalances that threaten China's future development.

"Policymakers have reiterated that they don't want to relax property measures, but it will be hard for them to further tighten in an overall economic climate where the recovery is still not on a strong footing," said Louis Kuijs, chief China economist at Royal Bank of Scotland in Hong Kong.

"They continue to express their desire to rein in housing prices, even though that turns out to be hard to do in the face of the fundamental drivers like income growth and urbanisation."

The property sector is a pillar of the economy, and investment in the sector accounted for 14.4 percent of GDP in the first nine months of 2012.

Analysts at Capital Economics estimate that investment in residential property alone accounted for 8.8 percent of GDP in 2012, up from 8.5 percent in 2011 and 4.3 percent in 2002.

That is well above the peak for real estate investment in the United States in the middle of the last decade and is also above the peak real estate investment rates recorded in South Korea and Japan during their periods of rapid growth.

PROPERTY CURBS TO STAY

China's home prices started to rebound in mid-2012, as the People's Bank of China began to ratchet up its policy easing as part of Beijing's growth-supporting policies.

Analysts believe government curbs on home purchases and prices will prevent sharp increases for now. Those polled by Reuters in December expected China's national housing prices should rise an annual 7 percent in 2013 and 5 percent in 2014.

A 25 percent jump in housing prices in 2009 prompted the government to take a raft of measures, including lending curbs, higher mortgage rates and restrictions on the number of homes each family can buy, in a bid to deflate housing bubbles.

Some analysts fear the authorities could tighten property policies further if they believe bubbles are building up again, undermining the still-fragile recovery.

City authorities in Beijing have stopped issuing pre-sales permits to developers found raising prices on their new property projects, as one of the ad hoc controls to curb housing inflation, said a senior executive of a developer in Beijing.

"The new home prices in Beijing are controlled by the government rather than the market forces while the recent rebounding of second-hand house market reflects the true property market," said the executive, who declined to be named.

Second-hand home prices in Beijing in December jumped 10.7 percent from a year earlier while Shanghai's prices also up 10 percent, data from a property consultancy Centralize showed.

Property prices in big cites are already high, after rocketing following Beijing's 4 trillion yuan (402 billion pounds) stimulus package in 2008-09 to counter the global crisis. Flats near the city's main financial street fetch 100,000 yuan per square metre, far beyond the reach of ordinary salary-earners.

Many Chinese academics have called for market-based levers, such as property taxes, to deal with speculative demand, following the example of Singapore and Hong Kong.

But a senior tax official said in remarks published on Monday that China may postpone expanding a trial property tax in Chongqing and Shanghai, nationwide.

UPHILL BATTLE

The PBOC, which cut benchmark interest rates twice in mid-2012 and cut banks reserve ratios three times since late 2011, has since switched to short-term cash injections via open market operation, apparently fearful of fanning price pressures.

But while the central bank may be wary of cutting interest rates and bank reserve ratios again after data showing consumer inflation in December quickened to a seven-month high of 2.5 percent, analysts expect it to keep the credit tab open.

China's social financing, a broad measure of liquidity in the economy that include corporate bonds and trust loans, jumped an annual 23 percent to a record 15.8 trillion yuan in 2012, while new loans rose 10 percent to 8.2 trillion yuan.

"There is still a need to stabilise growth this year and policy will still be relatively loose," said Zhao Xijun, vice dean of the School of Finance at Renmin University in Beijing.

"Bank lending and social financing will continue to expand appropriately this year, even though the government worries whether the increased money will go to the property sector."

(Editing by Alex Richardson)