China's Crazy Real Estate Market: Is The Bubble Bursting?

Shao Tian first came to Beijing from her hometown of Nanjing in 2006 for university. After moving back home for a few years, she then moved permanently to Beijing in early 2011 to pursue a job offer from a foreign media company.

The 24-year-old went looking for a place to live that would fit within her budget. And that’s when her problems started.

While staying with a friend, Shao frantically scoured Beijing's tough, expensive real estate market. After several visits to apartments with substandard living environments, her patience was wearing thin; the places she had seen were barely livable, and still beyond her budget. Then she decided to meet a different real estate agent from the one she was using, and settled on an apartment unit that was 500 yuan ($80) above her initial budget. But it seemed like the best she could do.

“Just when I thought I was lucky to have found this second agent and agreed on a deal with him, he started calling someone to talk about the contract, and told me that was my ‘real direct agent’,” Shao recalled.

It was then that she was hit with additional fees that had never been negotiated, or even discussed, previously. She took the deal just to finally end her apartment hunt, and ended up paying three times one month’s rent in fees alone.

Two months later, an agent accompanied by a construction crew came in to convert the living room into another bedroom, or else Shao Tian and her roommate would face a 30 percent rent increase. They didn't really have a choice, and let the construction begin. With the additional roommate, rent decreased by just 100 yuan a month ($16).

Stories like this one have become increasingly common since 2009, when the $586 billion stimulus package passed by China’s government to counter the global economic crisis that began the previous year produced a real estate boom that hasn’t abated since. The result is that three years later, home rentals in large cities, including Beijing, have become increasingly out of reach for middle-class people.

On the other hand, commercial spaces are showing a slowdown, from the giddy boom years toward more reasonable rents. According to the Chinese unit of U.S. real estate firm Jones Lang LaSalle (NYSE:JLL), Beijing saw a slowdown in high-end office building demand during the fourth quarter of 2012, and the year as a whole was “relatively sluggish.” At 0.7 percent quarter-on-quarter, it was the slowest growth in rental prices for high-end offices in Beijing in the past three years. That slowing trend fits with the overall economic goals of the national government, which is trying to trade short-term gain for long-term stability.

“It was reported last quarter that a number of tenants handed space back to the market and in response, several landlords were willing to offer discounted rents or other incentives in order to attract what they deemed to be high-quality tenants,” the Jones Lang LaSalle report said.

But for those hoping for a drop in residential rents, the outlook for 2013 still is not good. Ryan Isip, a local director in China for Jones Lang LaSalle, said the forecast for this year is very positive -- for owners. According to the company’s 2012 fourth-quarter report, this year “the market will continue to favor landlords and is thus poised for more rental growth over the next twelve months.” The report, however, also highlighted that yields for owners are expected to maintain a downward trend, as a result of Beijing’s increasingly high property taxes.

The Paradox Of Empty Luxury Buildings

But China watchers aren't worried about falling yields. They are more concerned about the risk of a real estate bubble bursting in the country. After all, the very crisis that prompted the Beijing government to pass that stimulus package in 2009 began with a collapse of real estate prices in America. Now the government is trying to stop the inflation of real estate prices by cooling down the market.

In March 2012, Premier Wen Jiabao answered the call of the public, assuring that his government would keep fighting one of the factors behind booming prices: speculation. Wen told the media that to back off from the issue would “cause chaos in the real estate market.” The government slowed the purchases of homes in some cities by requiring larger down payments and introducing increased property taxes, and sent out eight teams of regulators to 16 provinces to check on the implementation of the new rules by local governments.

A month after Wen announced the government's commitment, the China Real Estate Index System (CREIS) showed a nationwide drop of housing prices by 0.71 percent compared to the previous year. When China’s top policymakers gathered in Beijing for a closed-door meeting, the Central Economic Work Conference, in late 2012, they agreed to continue the property control policies in 2013.

But then, there's corruption. Partly, it's a result of China’s laws being unable to keep up with the pace of development.

Creative Corruption

Just 30 years ago, the mere notion of Beijing’s skyline filled with privately owned skyscrapers and luxury apartments would have been incomprehensible. Though private ownership of homes and office buildings is now legal, land still belongs to local governments, and can only be leased (for long periods of time) to developers.

That adds another level of potential corruption, which contributes to distorted market values and inflated pricing. Local government officials often lease out the land to developers willing to pay more than the actual value, or to pay kickbacks. In turn, the cost of development goes up and must be made up by selling units at a higher rate.

Another trend among China’s wealthy is to purchase multiple properties as investments, in hopes of re-selling at an even higher price. This leads to a situation where many brand-new luxury buildings are only half occupied, but are still unaffordable.

China’s central government has begun stepping in in recent years, rolling out new policies including bans on third-home purchases and restrictions on mortgage borrowing, as a way to tighten controls on a runaway market. In addition to government policies, increased government-subsidized housing was planned for low-income citizens.

A high-profile push to build affordable homes for the millions of Chinese who no longer have reasonable options began in 2010. The program aims to build 36 million units by 2015. The effort is spearheaded by Li Keqiang, the successor to outgoing Premier Wen, which ensures the plan will continue to be a priority in 2013. Xinhua News Agency reported that more than 820 billion yuan ($160 billion) was invested in the program last year.

The plan is not bulletproof. An investigation into a local government official, Zhai Zhengfeng, former housing bureau director in Zhengzhou, found that his family had amassed 29 new apartment units, 11 of which were intended to be part of the affordable housing plan.

Circumventing housing laws can take creative forms. Gong Aiai, 49, known in the Chinese blogosphere as “older house sister,” has been accused of using her position as deputy head of a local bank in northwestern China to obtain fake identity cards, one of which identified her as a Beijing resident, allowing her to buy high-end, profitable property in the nation’s capital.

According to the China Daily, Beijing police have canceled Gong's false ID and seized all of her assets in Beijing, including properties and cars. Additional investigations have been started in other Chinese provinces regarding her other properties.

All that, combined with the risk of a sudden downturn in the real estate market, has China’s central government anxious.

Of course, the economic benefits that a thriving property market has provided for China cannot be ignored. Increased infrastructure development, whether for affordable housing or not, equals more jobs, booming steel and cement industries, and increased revenue in taxes for local governments. And home living standards have improved not only for those who can afford luxury, but also for those in government-subsidized housing units, now better than those that cities previously built.

But the social impact of the skyrocketing housing market is a huge concern for the stability-obsessed country. The blatant disparities between wealthy homeowners with multiple properties and those who cannot afford rent highlight a deepening divide.