Pessimists point to growing vacancy rates and bad-loan ratios as signs of an unhealthy market, while optimists say government housing reforms have created enough demand for new homes to keep the market growing for many years to come.

"The real estate market is facing an adjustment, particularly in coastal cities like Guangzhou and Shenzhen," Yang Shen, director of the China Real Estate Association, told a recent seminar in Shanghai.

He was concerned that developers are increasing their investment in the real estate market far too quickly. During the first three quarters of this year, investment in real estate development increased 29.4 percent -- 3.7 times the growth rate of China's GDP.

Yang noted that there is 120 million square meters of vacant housing in the country, accounting for 26 percent of all residential space for sale. Guangdong Province alone has 25 million square meters of unsold housing.

Yang also said that 26 percent of the 9 trillion yuan (US$1.084 trillion) in loans issued for real estate development are non-performing, according to the National Statistics Bureau.

Although housing prices and the number of apartments sold have been on the rise nationwide for the last two years, their growth cannot keep up with the pace of new investment in the market, said Yang.

In Guangzhou for instance, the first half of this year saw sales increase a hefty 12.9 percent in terms of area over last year, but investment in land development soured a whopping 127.88 percent during the same period.

That disconnection between sales growth and investment is already having an effect on the industry with 97 percent of the 1,318 real estate developers in Guangzhou reporting losses during the last fiscal year.

The gap is smaller, but still worrying, in Shanghai where investment grew 45.3 percent during the first half of the year, while sales only grew 19.5 percent.

One major problem in wealthy cities like Shanghai, Guangzhou and Shenzhen, said Yang, is that developers are crowding into the high-end of the market, but most of the demand is for smaller, more affordable homes.

In Shenzhen, 70 percent of the property developers focus on the 5 to 15 percent of home buyers at the top of the social pyramid, he said. The average home in Shenzhen sold for 6,921 yuan (US$837.2) per square meter in 2001, far beyond the reach of most citizens in a city with an average monthly income of just 3,000 yuan (US$362.9).

While the numbers sound bad, optimists say there is plenty of room for growth in the industry, and talk of a bubble is unfounded. That argument is based on government housing reforms that began in 1998, which will eventually see all Chinese people own or rent their own homes instead of having them provided by their employers.

"In the coming 20 years, there will be demand for 100 million apartments," said Zhao Yanjing, director of Institute of Chinese Urban Planning and Design. "That demand will call for the construction of up to 600 million square meters of housing annually, but the current rate of construction is only 300 million square meters."

Yang warned of severe problems if the pessimists are proven correct.

"Real estate is the locomotive driving China's economic growth. If the brakes are put on, it will cause great losses to the national economy," Yang said.

(eastday.com October 19, 2002)