Pigeon lofts and tulip fever: What is going on in China’s property markets?

Remember this last year? Ghost towns - the global shorthand for the economic slowdown in China - filled with millions of empty apartment blocks, towering eerily in cities all over the mainland.

But only 12 months later, property prices in some parts of China are up by between 30 and 40%.

In one incident, footage from a surveillance camera appears to show at least 100 prospective home-owners storming a building in Hangzhou to snap up apartments, according to the South China Morning Post.

They meant business. If you remain even slightly unconvinced about the enthusiasm of these buyers, they broke the door down. It is thought they were trying to get in on the action before officials clamped down on excessive speculation in the property market in the city.

'Pigeon lofts'

Then, over the last weekend, the Global Times reported that property developers in Shenzhen launched the sale of "pigeon loft" flats - 6 sq-m apartments for $133,000 (£102,000).

Apart from the fact that it's hard to see why anyone would want to buy an apartment named after the abode for a tiny bird, these apartments were the smallest ever to go on sale, according to the Global Times.

The property developer claimed that the flats were sold out, adding to the hype around them.

However, soon afterwards, reports surfaced saying that, in fact, only 11 units had been sold and that authorities were looking into the developers behind the rumours.

Residents of Shenzhen have seen house prices soar in recent years

All of this is prompting at least one analyst to compare the run-up in China's property prices to the Dutch "tulip fever" crisis in 1637.

So why have China's property prices jumped so much, in such a short space of time - especially since the economy is slowing down?

Part of the answer lies in one tiny word: debt.

Chinese banks have been encouraged to lend more to companies and consumers so as to pump life back into the economy.

This is not a new formula. Remember, China did this from 2008 to 2009 in order to get growth going again after the global financial crisis.

This model, in part, is what's driving the price rises in some parts of China's property sector. Banks have been handing out loans like there's no tomorrow and that means it's much easier to get a mortgage now than before.

In theory, that should do exactly what it's intended to. Banks lend, people buy homes, those homes increase in value, people feel wealthier, they spend money, the economy grows and everyone is happy.

Except that trend of debt-fuelled growth can become dangerous, especially if homeowners default on their loans, leading to rising bad debts for the banking sector. Sure, as I've said before, the Chinese government could and would most likely bail out the banks.

But as Julian Evans-Pritchard at Capital Economics told me: "While we may often underestimate the ability of the state to rescue the banking sector, that doesn't mean we should ignore the credit risks. Chinese households aren't that leveraged - it's the corporate credit risk we are more concerned about."

Credit risks

And it's not just economists like Mr Evans-Pritchard who are worried.

Even the chief economist at China's all-powerful central bank, the People's Bank of China, has highlighted the risks to the economy from credit risks.

In an interview with China Business News, Ma Jun said that "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".

It's not hard to see why the central bank is so worried about a property bubble. Home ownership is culturally one of the most important aspects of Chinese life and while the stock market bubble bursting may have only hurt a small percentage of the Chinese population who invested in shares, the bursting of the property bubble would affect many more.

A property crash is the last thing the Chinese government needs or wants. Already some cities are drawing up restrictions on how many flats one person can own. But fundamentally, it's all that cheap credit in the system that has encouraged people to buy homes.

It's a double-edged sword. Clamping down on cheap credit means drying up the main stimulus of economic growth. Not doing so means risking a property bubble.