China: Property Bubble in the Making?

China's private property market in its infancy

Some major cities experiencing a bubble

Authorities taking precautionary measures against property price inflation

Ashvin Ahuja, an economist with the IMF, has made a study of property prices in the country. Speaking to IMF Survey online, Ahuja said he and his co-authors discovered worrying signs of property price inflation in some cities which had been fuelled by urbanization and investors pouring money into the property market.

IMF Survey online: How did the concept of private property market come about in China?

Ahuja: After China became the People’s Republic, the government was the sole provider of housing to its people. That is, until about 20 years ago. Then they tried to provide a legal foundation for private homeownership.

Ultimately, the government is still owner of the land, but it leases out this land for residential purposes. So you can live on that residential property and you have the right to sell it or rent it out for 70 years.

Then, 12—13 years ago, there was another milestone when the government started to encourage more people into buying and renting in the private market and discouraged state—owned enterprises from providing free or subsidized homes to their employees. So instead of providing subsidized housing, these enterprises gave housing benefits to their employees and then their employees would find housing in the private market.

IMF Survey online: So this is an incredibly new market? At most it’s a couple of decades old and, if anything, the true market really emerged in the last 10 years.

Ahuja: That’s right, over the last decade. The process of urbanization is the key driver of economic growth in China. Every year you have roughly 14—15 million new entrants into urban areas and so demand for homes is just enormous.

So they have to keep building, they have to keep accommodating enough people to make sure that prices don’t skyrocket every year, and the scale of that is just immense.

IMF Survey online: There has already been a steady increase in property prices in China, and this has worried a lot of observers. What’s been the scale of the rises and where have those price rises been concentrated?

Ahuja: Private house prices have been rising rather fast in China, about 100 percent every 5 years. So prices have doubled over the past 5 years in 35 cities in China. Price growth has been concentrated very much in larger or medium-sized cities, especially...