Analysis: China’s falling property curbs risk bubble which may harm economy

China’s attempts to slow runaway home-price growth in major cities are showing little sign of success, stoking the threat of a housing bubble that could destabilise the economy.

New home prices rose the most in six years in August, jumping 1.2 per cent from July, according to Bloomberg calculations based on government data. Home prices rose in 64 of 70 cities tracked by the government, up from 51 the previous month. Shanghai prices surged a record 4.4 per cent for a year-on-year gain of 31 per cent, while Beijing’s climbed 24 per cent from a year earlier.

The gains suggest moves by city governments to cool surging home prices over the past six months are doing little to damp demand from investors looking for alternatives to stocks and overseas property. That may prove to be a challenge for central government policy makers on how to respond without choking off growth in the world’s second-largest economy by squeezing credit.

“The more immediate risk of a sudden and steep downturn in the economy comes from the threatened bursting of the property market bubble,” Pauline Loong, managing director at research firm Asia-analytica in Hong Kong, wrote in a September 14 report. “And bubble it is. The real question for investors is when and what will pop the bubble?”

Ma Jun, chief economist of the People’s Bank of China’s research bureau, has warned about unsustainable valuations in the real estate market and the potential consequences.

“Measures should be taken to put a brake on the excessive bubble expansion in the property sector, and we should curb excessive financing into the real estate sector,” Ma said in an interview with China Business News last week.

Risks aside, property has given the economy a boost that’s helped the expansion continue prove doubters wrong and offset weakness in exports and other areas. Gross domestic product rose 6.7 per cent in the second quarter from a year earlier, beating estimates and dimming expectations that the PBOC would unleash new stimulus after holding the benchmark rate at a record low since October.

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The broadest measure of new credit exceeded estimates in August as property fueled near-term growth, even as it adds to longer-term worries about the expansion’s sustainability. The Financial News, a newspaper published by the PBOC, said in a commentary Monday that the better-than-expected credit data shows the economy is stable and on an upward trend.

Still, economists surveyed by Bloomberg project another rate cut by year-end. Such further monetary easing may complicate efforts to curb asset bubbles, a mission China’s top leaders pledged in July amid a renewed focus on financial stability after a Politburo meeting led by President Xi Jinping.

The rate cut cycle has been accompanied by a buildup in borrowing that’s boosted debt to 247 per cent of GDP, Bloomberg Intelligence data show.

Property prices that are still rising rapidly pose a dilemma for policy makers, Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note Monday.

“The overall monetary policy should remain accommodative as inflation remains subdued and growth is still trending down. However, concern about an asset bubble will limit room for further easing.”