China's real estate market seemed to have got into a strange position in 2004, as the central government issued a series of policies to cool down the sector, but housing prices continued to rise throughout the year.

This surprising double-digit year-on-year growth may have delighted developers, but made experts fear a market bubble.

According to the National Bureau of Statistics, by the end of November, China's housing price rose 12.5 percent year-on-year, up 0.8 percentage points by 11.7 percent in October. The growth rate is even higher in 35 major cities.

Faced with these price rises, different parties hold different opinions. Is the country's real estate market enjoying healthy and fast development or has an artificial bubble been created? There is still no definite answer.

The Chinese Government has made intensive efforts in terms of land acquisition, banking loan requirements and interest rates in order to moderate these roaring prices.

In line with the central government's policy, all land used for property development had to be publicly auctioned after August 31, 2003. Developers were forbidden to obtain land by transfer - simply getting land via under-the-table transactions based on negotiations with local governments.

"Such a move increases the land cost to some extent, but it is a must to enhance the transparency of the real estate market and guarantee fair competition," Gu Yunchang, secretary-general of China Real Estate Association (CREA), told China Daily.

From December 1, 2002, the developers' own capital should stand 30 percent of their total investment, 10 percentage points higher than before, while the threshold was further increased to 35 percent last year.

"As the banks tightened their controls the property development loans, developers have to find new financing channels," said Gu.

Such restrictions on loans seemed to deal a blow to some small-sized property enterprises, but offer opportunities to domestic and overseas non-banking financial institutions.

"The central government took this step to promote property market consolidation and reduce commercial banks' loan risks," said Gu.

The side effect emerged soon, as some funds linked to the biggest names in the international finance dipped their toes into this enticing market. They include Morgan Stanley, Lehman Brothers and Rockefeller from the United States, ING from the Netherlands and Singapore-based CapitaLand, Southeast Asia's largest listed company.

Another macro-policy was issued late October, as the central bank raised for the first time in nine years its benchmark interest rate by 27 basis points, one-year lending rate from 5.31 percent to 5.58 percent, and the one-year deposit rate from 1.98 percent to 2.25 percent.

The higher lending interest rate surely puts a heavier burden on developers' financing costs and the majority of the consumers, who acquire their property via banking loans.

However, the impact of these measures, aiming to cool down the overheated property market, is not as so palpable as the experts and insiders have predicted, with prices continuing to rise and market demand remaining robust.

The National Bureau of Statistics indicated late last month that average property prices in China's main cities rose 12.5 percent year-on-year in the first 11 months of 2004. Prices for residential and commercial property averaged 2,759 yuan (US$333.10) per square metre, with the average price of residential housing rising 11.6 percent to 2,580 yuan (US$309.90) per square metre between January and November.

Meanwhile, the housing vacancy rate continued to slide, as the vacancy rate for residential property dropped 12.9 percent year-on-year to 58.26 million square metres.

In the face of this bewildering situation, different parties hold different views.

Yi Xianrong, a professor at the Chinese Academy of Social Sciences, told China Daily that bubbles exist, "but not nationwide."

"In some specific areas such as Zhejiang, Shanghai and Beijing, the price hike is much higher than the average increase, even exceeding 20 percent," said Yi.

The excessive growth is rather irrational, which may be prompted by artificial speculation and will hamper the healthy and sustainable development of local markets.

"China's property market is far from mature. It is so closely related to the national economy and people's livelihood that the government should take some administrative measures to lead the market on to a sound track," said Yi.

Some real estate developers believe the market is mature and the price rise is understandable and will further rise in the foreseeable future.

"Limited land supplies, tightened bank lending policies and the interest rate rise during the current macro-economic adjustment results in prices roaring within the property sector," Zhang Baoquan, a leading real estate developer and deputy chairman of the Chamber of Commerce for the Housing Industry, told a high-profile property forum held in Beijing.

Meanwhile, the ever-increasing costs of raw materials bolster the housing price.

In addition, people's concerns about the reduced housing supplies and the rapid economic development in the nation will also boost the market demand.

"Prices are determined by supply and demand, over-intervention may interfere with the functioning of these market signals, which is likely to twist the market," said Zhang.

No matter what the experts and developers discuss, consumers cannot help but accept that "price rises are inevitable, unless more measures are taken such as another - but higher - interest rate rise," Hu Ming, a software designer, told China Daily.

Hu has had a "wait and see" attitude for several years, hoping the price can drop to a level he can afford.

"With all the government's new policies and all the media analysis, I am really afraid the bubble may burst after I buy the house," he said.

"However, the price is still getting higher and higher. My money prepared for the initial payment may become inadequate again if I wait for another couple of months."

Consumers also call for building more economically affordable housing, considering the average disposable income level in China.

(China Daily February 23, 2005)