After the stock market crash, a property bubble in China looms

SHENZHEN (BLOOMBERG) - After getting burned by the bursting of China's stock-market bubble, Liu Yihui is seeking salvation from the country's latest investment mania: big-city properties.

The 35-year-old civil engineer dumped his equity holdings after losing 40 percent last year, using the proceeds to buy a 5 million yuan ($763,464) apartment in Shenzhen. Prices in the southern business hub have surged more than 50 percent over the past year, the fastest pace since at least 2011.

"People are a bit crazy in this market, but what can you do?" said Liu, who took on a mortgage to buy the apartment, an investment property that he's renting out. "Stock returns were terrible, so I made up my mind to put my money in real estate."

In an echo of the buying frenzy that propelled Chinese shares to unsustainable valuations last June, leveraged speculators are snapping up homes in top-tier cities in hopes that prices will keep surging. The boom, fueled by monetary stimulus and a loosening of property curbs in February, shows how government efforts to revive the world's second-largest economy risk fueling asset bubbles instead.

In Shanghai, lines of prospective buyers outside property agents' offices clogged roads and forced police in the suburban Baoshan district to curb traffic as they sought to maintain order, Caixin reported Monday. The frenzy prompted China's official Xinhua News Agency to warn against "panic" buying, while Shanghai's government issued a call for calm on its official Weibo microblog account.

"There is no need to rush, the trading centers are open seven days a week," the city's government said in a posting on Feb 28. "The service centers will also deploy more people and add desks for buyers."

The clamor to buy is reminiscent of the Chinese property market boom that peaked in 2013, before regulators instituted a series of measures to cool the market. They began rolling back those curbs in November 2014, accelerating efforts to support demand last month by cutting down-payment requirements and reducing real estate transaction taxes. The measures -- intended to ease a glut of unsold homes in smaller cities -- have instead lifted prices in the country's biggest population centers.

"The bubble has been growing big," since the government rolled out easing measures last year, UOB Kay Hian Ltd. analysts led by Edison Bian wrote in a March 2 note to clients.

Demand is also getting a boost from monetary stimulus after the People's Bank of China cut benchmark lending rates six times since 2014, lowered banks' reserve requirements and flooded the financial system with cash to keep borrowing costs low. With local stocks in a bear market and yields on the nation's fixed-income securities near all-time lows, investors see few appealing alternatives outside real estate to park their savings.

"Property prices continued to soar in cities like Shenzhen and Shanghai for the past month, driven by the sharp surge of credit expansion, which appears to be endorsed by the central bank and local governments as a way to reinvigorate sales and digest inventory in third- and fourth-tier cities," analysts at HSBC Holdings Plc wrote in a March 1 report.

The boom is most extreme in Shenzhen, where prices jumped 4 percent in January from a month earlier and have gained 52 percent over the past year. Values in the financial center of Shanghai have increased 18 percent in the last 12 months, while those in Beijing advanced about 10 percent. Prices in many smaller cities have continued falling, though at a slower pace. In the northeastern city of Shenyang, for example, new-home prices slipped 0.5 percent in January.

Shenyang is examining a zero down-payment mortgage policy, the party committee of the city said in a Weibo post on March 1, an idea that the People's Daily decried on its microblog account, saying that an "artificial bull market" will cause hidden dangers. The Shenyang government subsequently backed away from the plan, saying on its Weibo account that its plans are still in a preliminary stage and "not ready for implementation."

Home prices in Shanghai jumped to a record high of 35,911 yuan per square meter, according to realtor China Real Estate Information Corp., or the equivalent of $509 per square foot. Those in Shenzhen have surged to the equivalent of $659 per square foot. By comparison, the price per square foot of a Manhattan apartment was almost $1,497 as of the third quarter of 2015, according to Miller Samuel Inc. and brokerage Douglas Elliman.

Authorities may act to cool demand in cities where prices have risen fastest, according to Alan Jin, a Hong Kong-based analyst at Mizuho Securities Asia Ltd.

Sleepless Nights

"First-tier cities could run the risk of overheating amid abundant liquidity," Jin said. "Some cities, notably Shenzhen and Shanghai, could introduce tightening measures in the near future."

For Yao Peirong, a 61-year-old Shanghai retiree, fear of missing out on the real estate boom has led to sleepless nights. After seeing prices soar in an area about an hour's commute from the city center, he bought a two-bedroom apartment there for 6.6 million yuan on Feb. 19. He borrowed 300,000 yuan within an hour after his first viewing to secure the purchase with a deposit.

"I couldn't sleep," Yao said. "Home prices in this neighborhood have jumped almost 11 percent since two weeks ago."