The amount of unsold housing rose sharply to 14.1% during the first eight months of 2002, according to the latest estimates made by the National Bureau of Statistics on the performance of the country’s real estate industry. The situation in cities such as Beijing, Changsha and Chengdu also shows that most developers are still only after the high-end market, which leads to further unsold housing space. Most of the real estate developers remain indifferent to the short supply in the lower and middle-end market, and many industry observers and experts are warning of imminent real estate bubbles.

Statistics show that at the end of July 2002, China’s unsold housing space totaled 120 million square metres, up to half of which remained unsold for over one year, resulting in over RMB257 billion in non-performing capital. This leads all other industries in terms of bad assets.

The scale of real estate construction in many cities appears to be being cut. Real estate development in Beijing has, all along, been testing the limits, surpassing Shanghai’s housing real estate boom in almost all aspects. Cranes towering over dusty construction sites dot the skyline of the capital city and many large office and residential towers are shooting up. The result: many high-end apartments remain unsold. Beijing’s total investment in the real estate industry in the first half of this year rose 42% to hit US$2.66 billion.

According to data released by the Guangdong Provincial Department of Construction, the province’s investments in real estate development rose sharply in the first half of this year, but the pace of growth in housing sales slowed down. Between January and June, housing sales increased by 13%, down 18% from that of the same period last year, although total area of land development and the area already under construction jumped 128% and 38% respectively. The scenario was similar in Shenzhen, where more than 70% of the real estate developers are eyeing the top 5 to 15% of the consumers, despite the fact that their purchasing power is nonetheless limited. The average housing price last year stood at RMB6,921 per square metre in Shenzhen and this rose further this year away from the mainstay consumer group, the average wage-earner who earns about RMB3,000 a month. Beijing faces the same problem. If the cycle for real estate development is calculated at four to six years, then 2002 should have been the year for Beijing to reach the ceiling in real estate supply. If sales continue to lag behind, the market will have to make adjustments to housing prices.

Wuhan’s housing market also reached historic heights recently. On top of several records set last year, investment in real estate development grew 27% to reach RMB9.5 billion. As much as 85% of the investments went to housing construction and the amount of floor space in housing under construction, newly started housing projects, and completed housing projects soared to new limits.. The total area covered by completed housing shot up 34% to hit 5.1 million square metres. Meanwhile, housing prices in Wuhan rose by more than 10%. Suzhou has also been affected by the overall increase in housing prices, which have risen to around RMB500 per square metre in the new region or even RMB1,000 in some of the hottest areas.

In 2001, China’s housing prices increased 2.2% from the year before and in the first half of 2002 grew a further 3.6%, staying within a reasonable range. According to surveys of 35 mainland cities, only five of the cities reported that the average prices per square metre were at or above RMB3,500. The ratio of housing prices to average disposable incomes stood at five to 14 times, in contrast to 6 times to 12 in the developed countries.

The Central Bank released a report recently on the implementation of the country’s monetary policies in the second quarter of this year. The report points to possible adjustments in the real estate industry following several years of rapid growth, a forecast that should arouse people’s attention. As to the contribution to the nation’s GDP growth, that of the real estate industry has been obviously far too high. According to estimates, real estate investments contributed directly to 1.3% of China’s GDP growth in 2001and indirectly between 0.6 and 1.2%. In total, the real estate industry contributed to between 1.9 and 2.5% of the country’s GDP growth last year. This is a clear indication that China’s GDP growth has been too dependent on the real estate industry.

The most important factor behind the real estate boom has been the country’s reforms in the real estate system and particularly the housing system that started in 1998. One can see an obvious watershed from the statistics over the years.

The Chinese economy started its rapid growth in the early 1990s and peaked in 1993 to 1994. This was followed by the central government’s drive to tackle the overheated economy, which led to downturns in both investments and the scale of housing construction. After hitting the bottom in 1996 and 1997, starting from 1998, the real estate industry began to experience an almost straight-line increase, which peaked before the end of the year; with total housing investments and new housing projects exceeding those of 1994. The Chinese economy continued to grow in 1999 and 2000, and the area covered by newly started real estate projects topped 200 million square metres in 2000. On top of that, 2001′s investments in real estate projects expanded by another 30%.

The rapid development, therefore, started in the wake of the 1998 reforms in the country’s real estate system. The real estate industry has so far been the driving force behind the development of the overall economy, and the reform has contributed dramatically to this. If the latest real estate fever is no bubble and all the demand seen so far is real, then the question is what will happen in the future? If the high-end market continues its expansion, a real estate bubble would be very likely, as there is no way of predicting where the market will turn.

China experienced a very dangerous real estate bubble ten years ago, which triggered two-digit inflation rates and led to mounting loans, that the banks could not recover, from speculative investments in the real estate industry. Such worries are again starting to haunt China.