China home prices thwart buyers

In Beijing and Shanghai, residential prices soared to an average of more than 12,000 yuan (US$1,700) per square meter, double the level three years ago, according to a December report by U.S. bond manager Pimco.

Expensive luxury units account for the bulk of sales; Pimco estimated that only 10 percent is to the mass market.

On the tropical island of Hainan, a resort and golf-course building boom has pushed prices still higher.

Given China's huge 1.3 billion population, scarce land and rapid urbanization, prices are bound to rise. But the skyrocketing prices of the past few years have many accusing property developers and local officials of hoarding land and properties so they can sell them later at higher prices.

Meanwhile, aspiring home owners like Yang find themselves outbid by wealthier buyers who snap up apartments so as to “flip” them for huge profits as prices rise.

To discourage such speculative buying, regulators have raised bank reserve rates and adjusted other policies affecting land and housing sales.

But broader moves are needed to reduce risks from property investments made without regard for potential returns, says Tao Wang, an economist at investment bank UBS. She puts the potential for nonperforming loans over the next few years at 2.5 trillion yuan-3 trillion yuan (US$367 billion-US$440 billion).

Most analysts say China is unlikely to face the kind of U.S.-style credit implosion that touched off the global financial crisis.

Residential mortgages here are relatively low risk, given the high required downpayments. Chinese banks have barely dabbled in the types of mortgage-related financial derivatives that triggered the U.S. property meltdown, and levels of debt remain low compared with many other economies.

Yet with prices stalled at untenably high levels, public angst over out-of-reach housing shows no sign of abating.

The government has repeatedly pledged to ensure a greater supply of so-called “economy housing” and is expanding programs to provide subsidized rental housing to low-income families. But the agenda does not include basic reforms, such as a property tax, that might help counter the market's tendency toward frothing into bubbles.

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