With all trends in China concertina-ed into ever-shorter time spans, talk of bubbles has emerged in the past year. And while property prices across China have soared since the late 1990s, there are also arguments for saying the property market is simply plateauing or slowing its charge towards higher valuations.
Underlying the property boom are tectonic shifts in China's economy and society, which are remaking the world let alone the local property market: a decision by all Chinese people to become middle class as quickly as possible, massive inflows of foreign investment funds, and a surge in business activity in all sectors.
The aspirations of China's masses are reflected in the names chosen for the new housing complexes being constructed by property moguls – Palatial Court, Billionaire Mansions, Tycoon Heights.
For ordinary people across China, the dream of home ownership is being realised, and the property market booms as a result, prompting a construction boom such as the world has never witnessed before. With China consuming roughly half of the world's cement, for example, builders as far away as Florida are reporting delays in deliveries and rising prices.
In 2004, property prices nationwide grew an average of around 10-12% year-on-year, according to official statistics; but in many markets, particularly Shanghai, the percentage increase was much higher.
The boom has resulted from an easing of economic regulations and a growth in salaries, but also it is an unleashing of demand which has been pent up for decades. The banks gave been happy to help fuel the boom, giving out mortgages of up to 80% of the property value with mortgage terms stretching as far as 30 years.
In the commercial sector as well, demand for office, commercial and industrial real estate has soared in recent years both in major cities like Shanghai, Guangzhou and Shenzhen, and upcoming regional centers such as Chongqing.
Overheating fears
The fast rise in property prices gave rise in 2004 to fears of overheating, and the government responded with measures to rein in credit and spending in a number of key sectors, including property. The evidence indicates that the measures had some impact in pulling back property growth and valuation rises, but not much.
China's cities are expected to grow by more than 12 million a year up to the year 2050, taking the urban population rate from just under 40% now, up to 60% by 2020, eventually adding more than 600 million to the urban population by the middle of the century. With so many new urban arrivals, a steady demand for new homes seems certain.
Some 1,500km inland, in the western metropolis of Chongqing, government-backed investment aimed at transforming the city into a regional economic hub resulted in a surge in construction and real estate prices.
Another significant force driving demand has been the lack of alternative investment channels available to the would-be investor. The stock market has performed poorly, and in early 2005, is testing six-year lows. Low interest rates provide little incentive to deposit money in the banking system.
In March 2005, the central bank increased the floor lending rate for housing loans of more than five years and increased the down payment requirement to 30% from 20%. But ironically, the government moves to put the brakes on excessive borrowing for property purposes have, at least temporarily, actually led to a further rise in prices in some sectors. The government's main aim appears to be to make the market more efficient by making it less reliant on bank debt, reducing the amount of mortgages, but not cutting off mortgages altogether. Also, property developers can seek other sources of capital apart from bank loans – private equity and foreign investment, for instance.
For the first quarter of 2005, investment by property developers in Shanghai was still up 25.8% year-on-year, but on the other hand, developers bought less land during the period than a year ago, suggesting at least a slowing down of the process.
Upside, downside
The impression has built up among many investors that putting money in real estate is a "safe play," and there is an assumption of no downside which traditionally presages a fall. Chinese investors are almost all inexperienced, and subject to panic as well waves of enthusiasm.
Some of the apartment stock of Shanghai was bought as an investment by individuals and stands empty, carrying the risk that, as with any commodity, if supply exceeds demand, prices will fall.
Another question is the impact of a yuan revaluation on property prices. An unknown amount of money invested in Shanghai property particularly is said to be parked there waiting for a revaluation to take place. Following which, presumably, many investors will want to take profit.
Many analysts, however, are optimistic whilst admitting that some fundamental weaknesses need to be addressed. They assume that if GDP growth rates remain north of 7%, there will be enough economic growth to sustain the development of businesses, thereby providing the cash to encourage companies and individuals to invest more in property.
Local demand is further bolstered in the Shanghai market by an influx in foreign investment funds, looking to take part in what looks to many like a once-in-lifetime opportunity to ride the rise of a city towards global status. Many people see Shanghai's destiny as being the New York of Asia, and property prices are getting up into that ballpark already.