China's Real Estate Riddle

NEW YORK (TheStreet) -- There is broad disagreement on the direction China's real estate market will take this year. While some analysts presage a crash with prices plunging nearly 30%, others are more optimistic and foresee prices improving by a healthy 10% to 15%.

During April, the Chinese government introduced tougher policies to rein in the property market. The government hiked minimum mortgage and down payment rates, restricted second home purchases, and blocked bank loans for third houses. China is contemplating on introducing a property tax, which seems less likely now as prices dropped by a marginal 0.1% in June, as compared with May.

Some economists are optimistic and foresee these measures as property-control policies and expect prices to drop in the near term. However, others see an even greater crisis brewing and believe that such measures will only induce a short-term correction, followed by an inevitable strong rebound during the fourth quarter of 2010.

Many analysts believe that the appreciating yuan will attract foreign investors to China's real estate, especially after prices drop. Industry experts expect the yuan to rise 3% this year. The first six months of the year saw investments increase almost five-fold compared with the same period last year.

Analysts at Credit Suisse studied the impact of "grey income," or income that goes unreported on the real estate sector. They cite a study by Wang Xiaolu, a Chinese economist, who reported that most Chinese households are wealthier than earlier because a part of their income goes unreported. Wang Xialou's research shows that a home in China costs only about 3.5 times the average household income, a figure that is lower than that of many developed countries. Credit Suisse postulates that property sales will bottom out moderately, before staging a strong rebound.

However, Kenneth Rogoff, a Harvard University professor, believes that a crash is imminent. This view concurs with a study done by Yi Xianrong, an economist at the Chinese Academy of Social Sciences, which measured the deviation from the demand-supply balance in the country's real estate sector. Currently, there are 64.5 million unoccupied apartments and homes in urban China, mostly owned by speculators hoping to make a profit from the rising prices.

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