Why Some Chinese Cities Boom Amid Property Bust

Most of the rest of the world’s No. 2 economy is dealing with a slumping property market that is weighing on the country’s growth. But China’s most economically developed cities have the opposite problem – they have fewer homes available for sale and surging demand from home buyers. China’s richest cities – called first-tier cities – are generally regarded as Beijing and Shanghai as well as the southern manufacturing hubs of Guangzhou and Shenzhen. Experts say there are signs that Shanghai and Shenzhen in particular are overheating. Average new home prices in Shenzhen are up 31.3% year-over-year in August, according to official data, much higher than the next highest year-on-year growth of 5.6% recorded in Shanghai. “The price rebound this year appears to be overdone,” said Wang Feng, director of Shenzhen Real Estate Research Center, though he said he didn’t think a bubble was forming. Shenzhen has a higher percentage of migrant population compared to the other first-tier cities. The southern Chinese city, which borders Hong Kong, has been a special economic zone since 1980 and is home to many technology entrepreneurs and financial innovation. Pent-up demand from buyers after five years of restrictive housing policies have contributed to the boom in prices this year, Mr. Wang said. The mountainous terrain in Shenzhen also restricts the amount of land available for building homes, he said. “The demand and supply dynamics in Shenzhen are vastly different from any other Chinese city,” he said. China’s property market suffered a sharper-than-expected downturn in 2014 but showed some signs of improvement this year after policy makers cut interest rates and loosened restrictions on multiple home purchases. The biggest cities and those in the coastal regions have recovered faster than markets in inland cities. In response, the Chinese government has made its easing policies more targeted. In late September, ahead of the Oct. 1 National Day holiday home-buying season, the central bank said that it is cutting the minimum down payment for first time homebuyers to 25% from 30% in cities that no longer have limits on home purchases. This excludes the first-tier cities and Sanya in southern Hainan province, which has a reputation as a vacation spot. In Shanghai, rising demand stemming from eased policies has resulted in more luxury-housing projects and rising investment levels in real estate development. In the first eight months this year, investment in real-estate development took up 57.7% of the city’s fixed asset investment, up from the 53.3% recorded for 2014, according to Shanghai city officials. Han Zheng, Shanghai’s Communist Party chief, said in early October that it is important for the city to control housing prices. “We must unswervingly resolve to lower the economy’s reliance on real estate, to maintain focus and not to use any short-term stimulus measure to ease for a certain time or for a certain place,” said Mr. Han. “We must be responsible to the people, to the future.” This article originally appeared on The Wall Street Journal.