Roundtable Discussion on China's High Property Prices

Since 2011,property prices in major cities around the world have generally risen amid an unmistakable trend of expanding asset bubbles. At the beginning of 2014,the Chinese property market defied that global trend and slumped badly,and the downturn didn't stop until the end of that year. In 2016,however,property prices in China's first-tier cities have risen significantly. In early October,more than 20 municipal governments across the country issued tough regulatory measures to restrain surging property prices. Prices in Beijing,Shanghai,Shenzhen and other cities have over the course of 2016 attracted great public attention,and there has been a growing chorus of questions about possible risks to the financial system. The following discussion attempts to examine those price movements and assess the future of the nation's property market.

Zhong Wei,deputy editor-in-chief of China Forex Magazine,speaks to Zhao Xiao,professor at the Institute of Economic Management at the University of Science and Technology of Beijing,and Shao Yu,chief economist of Orient Securities.

Zhong Wei: Distinguished guests,welcome to our Roundtable Discussion. As we have seen since 2011,prices of stocks,bonds and property have generally risen in developed countries,while prices in China have displayed great volatility. At the moment,property values have reached lofty levels. What changes have we seen over the last five years in property prices,including the important price-to-rent ratio in New York,London and other major cities? And what changes have we seen in Beijing,Shanghai,Shenzhen over the same period? Where have the differences been?

Shao Yu: Property prices have climbed in a number of overseas markets,especially in key cities,and that has resulted in declines in the price-to-rent ratio. Rents in China's first-tier cities had risen steadily in recent years but over the last year there has been a decline in the price-to-rent ratio because rents were unable to keep up with the gains in property prices. That has meant that the main driver behind property investment has been the potential for price appreciation.

Zhao Xiao: First of all,China is home to five of the world's 10 most expensive cities in terms of absolute levels of property prices. China also has 10 of the 20 cities around the world with the highest housing prices. Shenzhen,Shanghai and Beijing have for some time been among the most expensive cities in terms of home price levels. Property prices in Shenzhen and Beijing have already exceeded those of Tokyo and its surrounding areas while prices in the most expensive areas of three Chinese cities have already exceeded those of Seoul and are approaching levels in New York's borough of Manhattan. Prices in these Chinese cities are even higher when construction quality and income levels are factored in.

If we look at Beijing prices,for example,we see that they were 22.5 times average annual household income in 2015. Based on the latest global property price report by the International Monetary Fund,Shenzhen house prices were 38.36 times average income,ranking it No.1 worldwide among major cities in the first half of 2016 while Shanghai and Guangzhou were also among the leaders in that category. In terms of property rents as compared to prices,a reasonable level should be 4%-6% while Beijing was below 2%,less than the interest rate on some types of bank deposits. In Japan,the ratio of rents to sales prices was 8%. Based on the White Paper issued by Japan's Ministry of Land,Infrastructure,Transport and Tourism in 2012,42.2% of Japanese under the age of 40 owned a home in 1983,but that percentage had fallen to 28.4% by 2012. In the US the ratio of rents to property prices had basically held steady at 5%-6% over a 40-year period up to 2000,but at that point it slipped to 3% due to monetary easing policies. By 2008 - with the bursting of the property bubble - it had climbed back up to around 5%.

Another issue is the pace of the increase in property prices. Generally is not entirely unusual to see prices rise 50% over a five-year period,but the rise in Chinese property prices this year has been absurd. Based on the Knight Frank ranking of property price increases in major cities around the world in the first quarter of 2016,Shenzhen was No.1 with an average quarterly price rise of 62.5%,followed by Shanghai with 30.5%,while Nanjing was fourth with 17.8%. Out of the 10 cities with the world's fastest property price increases,three were in China.

Zhong Wei: This year,land prices and new property prices have surged in some first-tier cities and key regions in China. What do you make of these increases and are they typical? And what is the relation between the surging property prices in first-tier cities and the scale of land use transactions? And what do you make of the destocking we are seeing in some markets?

Shao Yu: The price surges you mentioned are regional features,mainly in China's mega cities. We are not seeing anything like this in the third and fourth-tier cities. Destocking has been seen at a faster pace in the first and second-tier cities but not in the third- and fourth-tier cities - at least not at a similar pace. Hence,the supply of land and new property starts has been surging in bigger cities. As a result we are seeing a greater disparity in market conditions between large and small cities.

Zhao Xiao: As I see it,there are three kinds of problems facing the property market. There are macro-economic problems,financial problems and the property market's own internal problems. The high prices are a combination of the economic situation and freely available financing. Based on a comprehensive analysis of all the factors,it was inevitable that land prices and prices of new properties would go up rapidly this year. If there is no adequate response from the government,the price rises which are now confined to certain regions will extend ac