March 12, 2019 / 11:29 PM / 12 days ago

Party on - Real estate booms in cradle of China's Communist revolution

YANAN, China (Reuters) - Staring at an array of floor plans in a showroom packed with models of apartment blocks set to go up in the northwestern city of Yanan, the young couple was faced with a tough decision.

FILE PHOTO - A man looks at a shantytown to be redeveloped, next to apartment buildings, in Fu county in the south of Yanan, Shaanxi province, China January 2, 2019. REUTERS/Yawen Chen/File Photo

Even as housing prices in places like Beijing and Shanghai have shown signs of cooling, they remain red hot in many small cities like Yanan, putting pressure on prospective buyers like Jia Luyu, 30, and her husband, to get in now – or be priced out of the market.

After a long deliberation on a recent afternoon, the couple decided to pour their life savings into a 1.1 million yuan ($163,653.95) three-bedroom apartment in a new district carved out of the loess hills that surround Yanan.

“Prices are rising too quickly here,” said Jia, a police department clerk, as she signed the contract. It was important to lock in a place as the couple plans for their first child, she said. Jia’s husband declined to give his name.

While the central government has tamped down property prices in bigger cities across China in an effort to control the longest real estate boom in over a decade, more fragile economies like Yanan have been left alone.

Worried by the effects of a slowing Chinese economy, which has been exacerbated by a bruising trade war with the United States, the government is allowing prices to rise quickly in Yanan and hundreds of other cities across the country.

Easy credit policies and official intervention in property markets are fuelling those price surges, raising fears that local governments may be creating the sorts of housing bubbles and debt burdens that Beijing has vowed to crack down on.

Real estate prices in more than 200 Chinese cities out of 336 tracked by the China Real Estate Association, mostly smaller provincial cities, have been growing at double digit rates in the past year, with Yanan’s rising more than 15 percent year-on-year in December, according to a Reuters analysis of the data.

A dozen home buyers and agents in Yanan interviewed by Reuters said prices had almost doubled for some new projects in 2018.

The building boom has transformed Yanan in recent years from a small town famed as the epicentre of China’s communist revolution in the 1930s into a bustling city of 2 million people.

But Yanan, located more than 800 kilometres from China’s prosperous coastal regions, remains heavily reliant on crude oil production, which has been hit by faltering prices, and local authorities see property as a key to growth.

The city government has intervened in the market by freeing up credit and reducing housing stock by demolishing ageing homes to spur sales of new units.

It has also invested heavily in developments like the Yanan New Zone, where Jia and her husband bought their flat, lured by the new schools and hospitals being constructed there. Her office was also moved to the zone from Yanan’s old town, along with a slew of government agencies.

“It’s ironic to think few had wanted to buy in this area not too long ago when prices were less than half of where they are now,” she said.

Much of that soaring demand stems from Yanan’s embrace of a national slum redevelopment programme, mainly financed by policy banks such as the China Development Bank (CDB). That has led to the demolition over 90,000 homes in Yanan in the past two years.

Those whose homes were demolished were paid off, with cash compensations ranging from hundreds of thousands of yuan to the millions, according to interviews with half a dozen Yanan residents and government proposals made public online.

Li Xing, a 32-year-old taxi driver, said his mud house behind a vegetable market will be demolished this year and that he plans to use the compensation for a down payment on a new apartment.

Yanan’s housing stock has fallen to “nearly nothing”, said an official at the housing bureau who asked to be identified only as Wang. The official said the city would stick with its current housing policies.

China’s leaders signalled in December that more policy easing at the city level would be tolerated this year as downside risks in the real estate market were increasing. Cities would be given responsibility for “stabilising” their respective real estate markets based on local conditions, they said.

Still, Yanan authorities appear to be trying to keep the city’s boom under the radar.

Yanan’s housing bureau stopped publishing monthly home price data in September. That followed a report in the official People’s Daily that the city’s price growth was the most robust in Shaanxi province. The housing bureau declined to comment.

‘UP TO THE GOVERNMENT’

As prices soar, developers have flocked to projects like the Yanan New Zone. Yango Group (000671.SZ) is constructing a residential project in the zone that is about the size of 70 football fields, with homes averaging 8,600 yuan per square metre.

Big-name developers such as Sunac (1918.HK) and Future Land (601155.SS) are also aggressively bidding for land in the zone, with hundreds of apartments planned.

Zhang Ning, who manages a 24-people sales team at Future Land in Yanan, said he was optimistic despite a slightly slower pace of sales since October.

“I’m hoping we can sell out by the end of this year,” Zhang said, adding that the developer had about 800 apartments planned. He said residential land prices in the Yanan New Zone have soared almost five fold since 2015.

Approving large numbers of new home sales has had a clear impact on the local economy, the authorities say. Real estate spurred Yanan’s economic growth by 0.4 percentage points in 2017, with an “obvious positive impact” on other related industries, the local Statistics Bureau said.

Property investment doubled in 2018 from a year earlier. Land sales totalled 2.8 billion yuan from January to November, up more than 450 percent from a year earlier, Reuters calculated from data from the China Index Academy.

“Whether the market will keep booming depends on whether the government is short of money or not,” Zhang said. “Take a look around, and just imagine how much debt the government has taken on in building this new zone.”

“And I think they will definitely seek to maintain the stability in the real estate market if there are signs of a sharp cooling,” he added. The local government did not respond to a request for comment.

RISKS IN THE SYSTEM

Sheng Songcheng, a People’s Bank of China adviser, told a forum in January he was concerned about the risks in smaller cities. China’s housing bubble is bigger than Japan’s when it burst in the 1990s, judging by the income-to-price ratio, he said.

“There are indeed some overshooting risks,” said Wang Yifeng, director of the Financial Center of Minsheng Bank’s Research Institute in Beijing.

An official close to the People’s Bank of China told Reuters the central bank would keep property risks in check, although he conceded that local governments would always find ways to let buyers bypass curbs and keep supporting high prices.

However, Liu Yong, CDB’s chief economist, dismissed concerns about a property slowdown dampening local economic growth, saying that the policy bank’s branches were monitoring conditions to evaluate projects and adjust policy accordingly.

“It won’t be a one-size-fits-all approach,” he told Reuters.

Slideshow (11 Images)

Even with the risks, many in Yanan feel the city’s role in Communist Party lore – President Xi Jinping also spent nearly a decade of his youth working in a village in the region – will insulate it from any downturn.

Yang Quan, who manages two apartments on Airbnb in Yanan, said he planned to buy a new home in the city this year.

“As long as President Xi Jinping is in power, Yanan’s property prices will keep rising,” he said.

Reporting by Yawen Chen and Ryan Woo; Additional Reporting by Beijing Newsroom; Editing by Philip McClellan

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