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Chinese Property – Heading into a Bubble?

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Chinese Property Investment 

By - Friday 14 May 2010

Property prices in the Asia-Pacific region are performing strongly at the moment, putting European and North American markets to shame with their price rises and rapid development.

The recent Knight Frank Global Real Estate Market report said that the region had generally rebounded well - especially in the second half of last year - after experiencing a slowdown in trade during the latter part of 2008 and early 2009.

But are the markets expanding at such a pace that investors should fear a UK or US-style bubble developing and the threat of a resultant crash and negative equity?

Perhaps the best performing country in the region is China. Its National Bureau of Statistics reported that real estate increased in value by 12.8 per cent year-on-year across 70 of its cities.

And while Deutsche Bank has accused its government of implementing "the most draconian measures on the property market in history" to take some of the heat out of the expanding market, it seems to have had little effect.

Already this year, the leading political party in China has restricted home loans for third property purchases, banned state-owned businesses from investing in property and raised banks' minimum reserve requirements.

The situation is reminiscent of the predicament that Japan found itself in during the 1980s as inflation and house prices soared, eventually leading to the stock market falling by more than 80 per cent, land prices tumbling by 60 per cent and almost a decade's worth of recovery to restore the banks.

Concern now centres on whether similar mistakes will be made by China.

"Higher inflation, rising property prices and wages all point to the risk of overheating," Kevin Lai, an economist with Daiwa Capital Markets in Hong Kong, told Bloomberg.

"Policy makers are hesitant because of Europe's debt crisis, but higher interest rates are the only way to contain rising bubble risks."

However, property is only half the story in China and the country retains a robust and thriving economy. In the first quarter of this year it posted growth of 11.9 per cent year-on-year - well ahead of the government's eight to nine per cent target.

Current government measures are working hard to ensure that the property market in China remains under control and the country's strong economy is beneficial to the situation, but further rapid gains could eventually have a negative effect on the sector.ADNFCR-3415-ID-19776158-ADNFCR

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*This page is provided for information purposes only and should not be construed as offering advice. IPIN is not licensed to give financial advice and all information provided by IPIN regarding real estate should never be treated as specific advice or regulations. This is standard practice with property investment companies as the purchase of property as an investment is not regulated by the UK or other Financial Services Authorities.

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