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Hong Kong property price rises provoke concern over boom bust in Chinese real estate market

The surge was due to a combination of low interest rates, limited supply and growing confidence in Hong Kong’s economic recovery, according to a housing index compiled by Centaline Property Agency.
It Centa-City Leading Index showed that Hong Kong housing prices have surged since the end of 2008, nearing the heady levels of 1997 just before the crash caused by the Asian crisis.
It is adding to fears that a bubble is developing not just in Hong Kong but in mainland China as well. But China’s stage of economic development means any property market bust would prove temporary, according to economists at the Bank of Japan and UBS AG.
China shares characteristics with Japan’s real estate boom of the 1970s, when the nation quickly recovered from a slump, according to a Bank of Japan research paper. The Chinese economy will be able to keep expanding even in the event of a property contraction, said UBS’s Beijing based Wang Tao.
But this view contrasts with that of Kenneth Rogoff, the Harvard University professor who said last month China may see growth plunge to as low as 2%in the aftermath of the collapse of a debt-fuelled bubble within 10 years. Premier Wen Jiabao is trying to rein in property speculation after prices rose the most in almost two years.
‘People tend to compare China with Japan in the late 1980s but the two situations are very different. The biggest difference is of course that China is still at a low stage of development, so if there is a big correction it still has the potential to grow out of it,’ explained Tao, the head of China economic research for UBS.
Economic growth of almost 10%, surging incomes and a rapid flow of people into cities spurred demand for housing and boosted property prices in Japan in the 1970s, similar to China today, according to the paper co-written by four BOJ economists.
But Tao also said the lack of a mortgage securities market in China means property buyers aren’t borrowing as much as Americans did during the US housing bubble. But he said the possibility of a boom-bust is quite high and ‘avoiding a property bubble in China will be very, very difficult’.
One problem is that local governments in China are aggressively developing properties to boost revenues. Capital inflow from overseas is also providing short term speculative money, the report said.
‘During Japan’s bubble economic boom in the 1980s, real estate prices rose without real demand for houses related to urbanization. That makes a difference from the booms in Japan in the early 1970s and China today,’ it added.