China's looming property bubble

Like most property markets, China's market comprises speculators, a mix of speculation and genuine homebuyers, and the one-off homebuyer. These buyers are reliant on the claims of developers, media reporting and government statements.

Speculation is a major component of this market: the practice of placing deposits on multiple units for resale nearing completion was also rampant in Malaysia, Indonesia, and Thailand prior to the Asian crash that delivered devastating results. The majority of China's population cannot afford to buy their dream apartments, and turn, instead, to speculation to increase their funds base, aided by developers and corrupt bank officials to circumvent government anti-speculation legislation.

Savings, family support and bank loans provide deposits on multiple apartments intended for resale before construction is completed, gaining a profit and repaying debt.

Many however, enter the luxury market with enough funds for one apartment at a time aiming for a higher profit, leading to misleading statistics in actual demand for luxury apartments.

Hukou (household registration), is a problem when trying to offload apartments to those outside Beijing. This can take more than five years.

Round robins provide buyers with a profit and opportunity to transfer residual risk to the bank if things turn bad.

Developers and developer scams

Developers range from corporations with government connections, local and central government state-owned enterprises, and corporations masking government participation in various projects. Companies across China now incorporate property development divisions in their operations to exploit new profit opportunities.

Because of anticipated high profits, focus is on palatial commercial property, luxury apartments, villas, and elite recreation facilities. The lower level executive apartments for the middle class form the secondary market. But totally ignored, except when demanded by Beijing, is the very high density, small, low-cost high-rise apartments.

Taking multiple deposits on apartments at below market prices up to 18 months pre-construction is common. The developer then claims various causes to boost the price when construction is due to start and later repays deposits. The intention is not to defraud buyers of deposits, but to use the deposits as interest free working capital for up to 18 months. One developer is reputed to have earned US$106,000 per month in interest on deposits totalling US$30 million.

Deposits can count as sales, inflating asset values to support loans, creating a false impression of demand.

Banks

The banks benefit from both the developer and the buyer. More clients means increased numbers of loans and greater turnover for the bank. Fake mortgages and inflated numbers of sales inferred by multiple deposits support loan extensions or new loans for the developer.

Banks sell loans to financial institutions, including pension funds, or repackage them into wealth-management products in largely unreported transactions. December 2009, Fitch Ratings reported: