High cost of property hits China's middle class

For the past two decades, property has been one of the foundations of China's phenomenal growth. But there are ongoing worries that the market may be overheating. So should you buy at any cost?

Stephanie Chen lives and works in Shanghai Pudong. She is an architect, and at the end of 2009 decided to buy her first property.

Like many in China's middle class, Stephanie worried that if she did not get on the property ladder, prices would continue to rise so quickly that she would be priced out of the market.

With the help of her family, Stephanie paid 1.05m yuan ($162,000) for her first apartment in Shanghai in December 2009.

Since then, property prices have continued to rise. It isn't easy for the young, for graduates, or even for people already in the middle class to buy property, especially in China's big cities.

The gap between house prices and income has become too big. A decent apartment can now cost as much as $500,000.

Demand for apartments has been fuelled by buyers like Stephanie, and many others who see property as a a good investment.

In China investors have only a limited range of financial products to put their cash, and with property values still rising, bricks and mortar are delivering higher rates of return than interest rates paid on savings.

Ghost houses

But Patrick Chovanec, Professor at Tsinghua University's School of Economics and Management in Beijing, is cautious.

"People who buy for investment need a place to stash their cash, so they are buying new units," he says.

"Often these are just shells of buildings, with no fixtures or fittings inside. Those who are stockpiling property believe that it's worth a lot."

"But we just don't know how much these properties are worth, because the prices aren't being tested in the market place," cautions Professor Chovanec. "Just what would the price be if people started to sell them?"

Well-off Chinese families may own five or even 10 apartments, and some of these might have been standing empty for five years.

Critics say that easy lending and low interest rates have led to a construction boom that has produced ghost housing estates and even ghost shopping malls.

One estimate put the number of unoccupied apartments bought as speculative investments at 65 million units.

Reining in the market

In many cities, ordinary workers have been frozen out of the market, while the middle classes struggle to find an affordable home.

It is this kind of speculation that the Chinese government is attempting to rein in, using a whole raft of measures.

Earlier this year a property tax was introduced, together with a ban on bank loans for a third property.

In addition, first-time buyers now have to make a minimum down-payment of 30%, and those buying a second property must find a 60% deposit as well as paying higher interest charges.

In the past few months, official figures show that the market is cooling slightly. Prices of homes are still increasing month on month, but at a slower pace, suggesting the government's changes are taking effect.

Stephanie has noticed the difference in Shanghai: "I can tell from going to the real estate agent that house prices aren't rising as fast as they were, and that the number of transactions is down," she says.

"Also the government is building rent-controlled apartments for low-income people, and I think that will make house prices a little more stable."

Stephanie sold her apartment recently for 1.19million yuan - a profit of 140,000 yuan ($21,000) made after living there for just over one year.

She has bought another home for almost 2.3million yuan. This time she put down a deposit of 30%, and took out a 25-year mortgage because she wanted to pay her family back.

"My parents are healthy and well, but they might need money sometime soon, so I wanted to pay them back what I owed them," she says.

Safe investment?

Financial adviser Crystal Ke thinks it is much better for young homeowners like Stephanie to be independent from their families if they can, and not to overstretch themselves financially.

They should also assess if this is the best use of their money. What about using the cash to start a business? In the current market, even renting could be a good option.

"People think property is a safe investment in terms of their asset allocation, but now is a time to watch and wait."

"There is a bit of a bubble in the market, it's not a very big bubble, I don't think the market will fall immediately, but we have to watch it in the future," she says.

Professor Chovanec says there's a difference between buying property as a home, and buying purely for investment.

"If you're going to live in a property, it's worth what you're willing to pay for it. If the price goes down, you still have a place to live. But if you're buying as an investment, you better be very confident."

"Ask yourself - what cash will this investment generate? At the moment in China, individuals are investing with no expectation of a cash yield - they just assume the prices will continue to go up. That's very worrisome."

The opinions expressed are those of the contributors and not held by the BBC. The material is for general information only and does not constitute investment, tax, legal or any other form of advice. You should not rely on this information to make any investment decisions. Always obtain independent, professional advice for your own particular situation.