New residential buildings on sale in Shenzhen, Guangdong Province (XINHUA)

Wang Limin, a 35-year-old engineer who lives in Beijing and owns a 71-square-meter apartment in the city center, has seen his property appreciate by more than 2 million yuan ($296,700) in less than one year. "I could never live in such an apartment if I hadn't sold my 49-square-meter apartment and spent the money as a down payment on this one at the end of last year," said Wang, referring to Beijing's skyrocketing property prices.

Last December, Wang bought the apartment for 3.1 million yuan ($459,900). Now, though, he can expect to sell it for 5.6 million yuan ($830,700), and purchasers would line up to do the deal. "The old one was too small for a family of three people, so I made the decision to change to a larger one without hesitation," he said, adding that one of his colleagues, who had been waiting since the end of last year for the "right opportunity" to buy an apartment for herself now cannot afford to do so.

Around the beginning of October, a total of 21 large cities across China released policies to restrict housing purchases, in order to stabilize property prices and people's expectations of the residential real estate market.

Just before the new purchasing curbs were imposed, housing prices were still surging. In September, the price of new homes in 100 cities surveyed averaged 12,617 yuan ($1,870) per square meter, an increase of 2.83 percent month on month—0.66 percentage points higher than the figure of the previous month, marking a 17th consecutive month-on-month rise, according to China Index Academy, a Beijing-headquartered independent property research organization.

Since the middle of last year, real estate prices in large cities have shot up, and the trend later spread to smaller cities. Home prices in four first-tier cities—Beijing, Shanghai, Guangzhou and Shenzhen, shook off price drops last June and began to register accelerating growth. Subsequently, second- and third-tier cities, mostly regional centers, began to witness property price growth last December and this March respectively. By the end of September, prices in first-, second- and third-tier cities had risen 21, 14 and 7 percent respectively since the beginning of the year, according to the National Bureau of Statistics (NBS).

Concurrently, housing loans made up the bulk of commercial bank lending. According to their mid-year reports, the outstanding personal mortgages of 18 domestically listed commercial banks reached 14.12 trillion yuan ($2.11 trillion) at the end of June, a dramatic increase of 20 percent from the end of 2015.

Astounding momentum

From January to September, the number of land transactions in 300 cities surveyed dropped 7 percent year on year, and the total area that changed hands—575 million square meters—decreased 2 percent. In stark contrast, total income from land sales hit 1.93 trillion yuan ($286 billion), up 40 percent year on year, and income from residential land sales reached 1.5 trillion yuan ($223 billion), soaring 56 percent, according to a report from China Economic Net, a Beijing-based business news portal.

Chai Qiang, Vice President of the China Institute of Real Estate Appraisers and Agents, said that land prices have been on the increase since the beginning of this year and have significantly driven the housing market by boosting people's expectations of price rises.

While soaring property prices push real estate developers to jockey for land, developers have more funding sources these days and can borrow comparatively cheaply. These two factors have jointly contributed to sky-high land prices, Chai said.

At present, local governments still tend to secure their fiscal expenditure by granting land use rights. For them, the focus is on how much money they can make from land sales, rather than how much land they actually sell, said Yan Yuejin, chief researcher at a think tank under the E-house China Research and Development Institute, in an interview with the National Business Daily.

Li Yujia, a research fellow at the Shenzhen Real Estate Research Center in Guangdong Province, observed that this round of real estate boom exhibits two features—high leverage ratios and the pursuit of superior investment returns.

In the past few years, the ratio of new residential house loans to new real estate sales has been increasing, said Jiang Chao, chief macroeconomic analyst at Haitong Securities Co. Ltd. That ratio, which was merely 19 percent in 2011, reached 39 percent in 2015 and has shot up to 50 percent so far in 2016.

"To ensure stable economic growth, the expansion of the money supply should be pegged to a certain speed. Before 2008, China's foreign trade experienced rapid growth. After 2008, efforts to boost domestic demand yielded significant results, and the country's manufacturing industry kept expanding. Hence, during that period, money flowed to the real economy. However, with foreign trade and domestic demand saturated, funds now flock to the real estate market," said Zhang Dawei, a market analyst at the Hong Kong-headquartered Centaline Property Agency.

Aside from that, as the real estate market in third-, fourth- and fifth-tier cities looks set to have gloomy prospects due to population outflow, investors and developers have been focusing their investment on first- and second-tier cities, leading to the sharp upturn in real estate in these cities, Zhang said.

Economist Zhang Wuchang believes three factors have caused the most recent property price growth in first- and second-tier cities. First, young people are more willing to live and work in large cities, where they can earn higher wages, so their migration has remarkably pushed up home prices. Second, since financial investment products in China are still heavily regulated and strictly limited, speculative money tends to flow into property. Third, the expectation of yuan depreciation has encouraged people to invest, but doing so overseas is difficult, so buying property in China seems a reasonable and appropriate choice.

Future trend

Future demand will decide whether housing prices continue to rise, said Deng Haiqing, chief economist at Jiuzhou Securities Co. Ltd., who believes the combination of rigid demand for homes and investment demand is what primarily influences the trajectory of property prices.

Rigid demand depends on the rates of aging and urbanization, because the two factors jointly result in changes to urban populations, Deng said.

Population aging, however, may actually exert relatively little influence on the real estate market. As early as the 1990s, for instance, population aging showed signs of acceleration in the United States, but residential property prices continued to increase. And, despite a decline due to the subprime crisis in 2008, U.S. housing prices have risen above their pre-crisis levels.

"We should not equate population aging with a drop in housing prices," Deng said.

Urbanization, meanwhile, is still underway in China. NBS statistics show that in 2015 urban residents accounted for 56.1 percent of the nation's total population, a ratio that lags far behind the average in developed economies.

From 2002 to 2015, the annual average growth of the proportion of China's populace living in cities was about 1.3 percentage points, indicating that urbanization is still ongoing, according to the NBS.

"International experience shows, whether in developed or developing countries, only when the urbanization ratio reaches 70 percent can the process be considered complete. Currently, China still faces a gap of 14 percent. If the urbanization ratio increases 1.5 percentage points annually in the future, the nation will still need a decade to complete the process," Deng said.

Real estate control measures can only influence price fluctuations in the short term. In the long term, urban residential property prices will continue their upward trend, he asserted.

Copyedited by Chris Surtees

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