Key to growth?

The real estate sector in China contributes about 20 percent of fixed asset investment and about 10 percent of gross domestic product, analysts say.

This has raised questions and sparked controversy: has the sector "kidnapped" China's economy, with the government unwilling to take tough measures to curb home prices out of fear it will pull down GDP growth?

Analysts said high home prices also denting private consumption, as a flat in a big cities could cost the savings of up to three generations.

"As the property market is recovering rapidly this year, housing prices in some cities are rising too fast. This deserves the great attention of the central government," Premier Wen Jiabao told Xinhua on December 27.

Housing prices in China's 70 large and medium-sized cities rose 7.8 percent in December from a year earlier, the fastest pace in 18 months, official figures showed.

The picture in some big cities is especially alarming: new home prices in the southern boomtown of Shenzhen doubled to 21,660 yuan per square meter on average last October from February, when prices began to climb.

The central government is worried about home price rises in cities when increasingly numbers of middle-income families are unable to afford housing, Wang Tao, head of China Economic Research at UBS Securities, wrote in a research note.

But the government is cautious about taking measures on fears that some measures, if too harsh, could hurt the construction industry -- one of the main drivers of China's economic growth at a time external demand for Chinese exports is still weak, she said.

Given the importance of the real estate sector to economic growth and local governments, the central government will increase housing supply, rather than unveiling harsh measures to curb home prices, China International Capital Corporation (CICC) economists led by Ha Jiming wrote in a research note. Overly harsh measures could result in a slump in economic growth, they said.

The real estate market might remain weak in the first quarter of the year, as the buying spree at the end of 2009 on speculations that tax and interest rate incentives would end reduced the number of potential home buyers, the note said.

But housing prices might continue rising in the second quarter as inflation may leave the real interest rate negative, they added.

(Xinhua News Agency February 11, 2010)