The head of state-owned conglomerate China Everbright Holdings has warned of the dangers of rising property prices on the mainland and said that because of market volatility the group would be cautious about investing in the sector this year.
Price rises in some places were 'frightening', chief executive Chen Shuang said in a rare warning by a senior mainland property executive.
He believes a bubble exists in the mainland housing market, and that an interest rate increase will probably be announced by the People's Bank of China earlier than the market consensus of the third quarter. He also says measures taken so far by the central government to tighten monetary policy are essential given how much liquidity is in the system.
Chen said the situation in places such as Sanya in Hainan, where prices soared by some 30 per cent in a fortnight, had reached 'frightening' levels, with early signs of a housing market crisis similar to the one that took place in the United States emerging.
'In China what was different [in the past] was that a few generations would live under one roof and purchase one property. Now there are rich middle-class Chinese who are buying multiple properties,' Chen said.
He said that while people used to have sufficient savings to buy houses, the younger generation was borrowing more and more money to fund their investments, a situation not dissimilar to one that sparked the US subprime housing problem.
Chen attributed the problem of rapidly rising property prices to the over-reliance of local governments on the sector for revenue. He said local governments derive 40 per cent of income from land sales.
'Local governments hope property prices will rise so that land auctions can fetch higher prices and their revenue will increase as a result,' he said. 'Local governments have a lot of debt to pay off.'
In addition to local governments, Beijing's coffers are also benefiting from rising property prices, posing a dilemma for the government in how to tackle the problem without jeopardising gross domestic product growth and suffering the after-effects of 'putting on the brakes too fast'.
'The government's question is, does buying property constitute consumption or investment?' Chen said.
The central government has so far implemented a number of policies aimed at gradually cooling the housing market.
Premier Wen Jiabao said in December that the government intends to increase the supply of affordable housing to low-income groups while loan conditions for buyers of second homes had been tightened with down payments of 40 per cent required.
Figures from last month show that the measures may be having an effect. Transactions, an early indicator of movements in the housing market, fell in the first two weeks of January in Beijing, Shanghai and Shenzhen compared with December, though prices continued to rise rapidly.
Analysts say prices take time to adjust to the decrease in sales volumes and that if the trend continues prices could fall in line.
The Everbright group invests in real estate in China through its Everbright Alam China Real Estate Fund, which has a total equity investment of US$220 million. China Everbright also develops property through a subsidiary, China Everbright Real Estate Development.
Chen also said he believes the share of investment in GDP was too high. Figures from the National Bureau of Statistics released this month show that gross capital formation contributed 92.3 per cent to overall GDP growth in 2009.
China Everbright group chief Chen Shuang says the real estate market is at 'frightening' levels
The proportion of local government revenue that relies on land sales: 40%
Property prices have soared in places like Hainan, which saw a leap of this much in a fortnight: 30%