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China's housing gets scarily expensive

The rapid rise in house prices in big Chinese cities may mean a real estate bubble is inflating to bursting point. A stronger property rally lasting into 2017 may increase the risk of another major round of downward adjustments thereafter. Investors should closely monitor property sales, new property starts and property investment for near-term upside risk, which may increase the medium-term downside risk.

      Average new home prices in China's 70 major cities rose 9.2 percent in August from a year earlier, accelerating from a 7.9 percent increase in July, an official survey from the National Bureau of Statistics showed. Home prices rose 1.5 percent from July. The data showed prices in the first-tier cities of Shanghai and Beijing prices rose 31.2 percent and 23.5 percent, respectively. Home prices in the second tier cities of Xiamen and Hefei saw the largest price gains, rising 43.8 percent and 40.3 percent respectively, from a year ago. Earlier, the Chinese government introduced measures aimed at boosting home sales to reduce large inventories in an effort to limit an economic slowdown.  While the moves have boosted prices in top-tier cities with some spillover in lower-tier cities, there were still concerns of uneven bubbles in the market.

      Chinese property sales growth reaccelerated in 2016, increasing by 25 percent year-on-year, year-to-date. Property starts grew 12 percent year-on-year in the same period, after two years of decline. Property prices in some cities have risen by 30-40 percent or even 50 percent year-to-date. While the rally is spreading, many smaller cities are still struggling with oversupply. Four of the five cities with the fastest-rising global housing markets in the year to March were in China, according to real estate agency Knight Frank. These were Shenzhen, Shanghai, Nanjing and Beijing, where house prices rallied by between 62.5 percent and 17.6 percent in the period. China's property recovery follows two years of policy relaxations, starting with the easing of home purchase restrictions in 2014. Investors should watch for the government's response if the rally shows signs of bubbling.

      How the property market fares will be tied to China's overall economic performance. The International Monetary Fund sees Chinese economic growth continuing to slow, but remaining high compared to global norms. Gross domestic product (GDP) expansion is forecast by the institution at 6.6 percent this year and 6.2 percent in 2017.

      In urban China, the average price per square foot of a home has risen to $171, compared to $132 in the U.S.