Economic Watch: Property frenzy unlikely to trigger bubble burst

After months of rapid home-price growth in some Chinese cities, concerns have been raised about the risks this will bring about -- concerns that are often expressed with the terms "bubble burst" and "economic hard landing."

The development of the country's property market has been uneven. While many small cities are still struggling to destock, property prices in the country's tier-one cities -- Beijing, Shanghai and Shenzhen -- and a handful of second- and third-tier cities have soared at a staggering rate.

The property recovery has helped to support growth this year, after deep adjustments in the sector were blamed for China posting its lowest economic growth in 25 years of 6.9 percent in 2015.

Property is arguably the most important sector in China. A slowing property market not only means less investment, but also leads to reduced demand for construction materials, machinery and transportation; dragging down everything around it.

China aims to keep its annual growth between 6.5 percent and 7 percent this year. Undoubtedly, a booming property market will make that target easier to attain.

The rally has resulted in unsustainable property and land prices, which may increase costs in other sectors to a level that hurts the overall economy and China's competitiveness, diverting more resources away from productive sectors, such as manufacturing, to property and related sectors, UBS China economist Wang Tao said.

Wang believes that the recent frenzy will not burst the property bubble or result in an economic hard landing anytime soon.

Although strong property price momentum is spreading, many small cities are still left with excess inventories and subdued prices. Despite a surge in mortgages, China's household balance sheet also remains relatively healthy overall, she said.

More importantly, property investment and overall construction activity are growing "only modestly" despite the rally in housing and land prices, and construction is where the biggest potential drag on the economy would come from, Wang added.

The frenetic pace of home price growth could last into 2017, posing a challenge for governments who may find it increasingly difficult to regulate the market.

Analysts said the spread of price surges to more cities alongside an alarming rise in leverage could trigger more aggressive policy tightening measures, cooling the rally.

Given the severe undersupply of flats in first-tier cities, housing prices will continue to rise, said Yan Yuejin, an E-house China analyst.

Yan expects the government to introduce differentiated policies -- controlling home prices in first- and some second- and third-tier cities, while digesting oversupply in other areas.

Tighter restrictions for those wanting to buy second homes will be highly likely, he said.

Cities like Suzhou, Xiamen and Hangzhou have already resumed home purchase restrictions, while several others have raised their minimum down payments.

Zhang Dawei, analyst with Centaline Property, said the government should step up targeted tightening, pressure some local governments to reintroduce home purchase restrictions and increase land supply.

Of 70 large- and medium-sized Chinese cities, 64 reported new home price climbs month on month in August, up from 51 in July and 55 in June, latest official data showed. Endi