World Bank voices concerns about Chinese property prices

China’s real estate data may be masking the degree that speculation is driving up prices in some of the larger cities, according to the World Bank.

Official figures might actually under play reality, said the development bank’s chief economist Ardo Hansson. ‘It’s people buying because they think next week or next month it will be even higher,’ he explained.
If true it will add to concerns about a property bubble. The latest government data showed Chinese real estate prices climbed the most in the last 18 months to December, highlighting a struggle to rein in speculation while sustaining an economic rebound.
Hansson indicated that the government may have to take further steps after the central bank already told lenders to boost the assets held as reserves. ‘It’s good to try to nip these trends a little bit in the bud,’ he said.
Residential and commercial real-estate prices in 70 cities increased 7.8% from a year earlier in December, topping a 5.7% gain in November. Values of some luxury units in Shanghai doubled last year.
‘Excess liquidity in the system is planting the seeds of surging inflation and asset bubbles,’ said Diwa Guinigundo, deputy governor of the Philippine central bank.
The Chinese government has already said it will clamp down on speculation and measures being considered include increased taxes, interest rate adjustments and land regulations. The central bank increased banks’ reserve requirements on January 12 for the first time since June 2008 and has also guided bill yields higher at auctions this year.
But China’s economy expanded a more than forecast last year, adding to the case for policy makers to pare back stimulus measures.
But not everyone is worried. An end to a honeymoon tax break on property resales and fears of further measures aimed at curbing price rises may now put the lid on surging demand, they claim.
Those who are not concerned cite figures from property consultant DTZ that show new home sales in Beijing dropped 45% to 318,000 square metres in the first two weeks of January compared with the last two weeks of December, in contrast to the official figures.
Mark Mobius, who oversees $34 billion of developing market assets at Templeton Asset Management said; ‘If a property bubble means too-high prices, you can see much higher prices in Australia or Hong Kong’.
The housing ministry has also called for stricter rules on giving mortgages to second home buyers and is discussing eliminating discount financing for buyers who already own one home.
Loan quality among China’s biggest banks has continued to improve, especially compared with the US and Europe. Wang Zhaoxing, vice chairman of the China Banking Regulatory Commission, said the amount of non-performing loans in Chinese institutions was stable though he said there are risks if property related lending continues to grow quickly.
‘Until now, loans to developers and to mortgage borrowers combined account for about 20% of China’s new lending as well as the outstanding loans,’ he said.
However, doubts persist whether the authorities will manage to prevent an asset bubble after last year’s borrowing spree when Chinese banks probably doubled lending to some $1.5 trillion. ‘The Chinese government is trying to use administrative measures to contain it. But our experience in the last few years tells us that while such measures can contain the issue for a while, they have never been able to fundamentally resolve it,’ said Credit Suisse Equity Strategist Vincent Chan.