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Last Updated: Thursday, 15 July, 2004, 22:41 GMT 23:41 UK
Climbing China's property ladder
Mary Hennock
BBC News Online business reporter

As far as Yang Xiang is concerned the best thing about his new home is that he has chosen it, and everything in it.

A real estate office in Shanghai
Chinese want the right to choose their homes

The furniture is being handmade on site from drawings by a designer who spent two months getting to know his tastes.

"I'm quite satisfied with it because I didn't have to accept what I was given by other people. I could make my own choice," says Mr Yang.

His words express how many Chinese feel about going up the property ladder, leaving behind dingy apartments allocated by work-units under China's defunct Communist welfare system.

His old home in the southern city of Kunming was doled out when he was a junior civil servant, low down the perks list.

Mr Yang is still no Donald Trump, despite his high-roller decorating habits. But like millions of middle-class Chinese, he and his wife are pouring their savings into a newly built flat and have taken on a hefty mortgage for the first time.

Domestic dreams

China's banks used to exist solely to channel money to state firms, but market reforms have created a consumer credit industry.

Mortgages are the biggest slice of this fast-growing, and under-regulated, money market.

For the Chinese government, it presents an opportunity to encourage household spending and keep the economic boom rolling.

For buyers it brings the promise of bliss - a four bedroom, three-balcony flat in the suburbs for the Yangs and their baby, or a "real place of our own" for Beijinger Lucy Xu and her husband.

Policy juggling

But trouble may be brewing, as the government juggles to curb a speculative building boom without breaking its promise of better living standards.

Take a look at China's old and new homes

Last year, property building hit a record 18% of China's fixed asset investment; now the sector is being targeted for a cool-down, along with others China's rulers fear are overheating.

Rampant speculation in Shanghai rang alarm bells after residential prices there shot up 25% last year and "really got a lot of people yelling," says Kenny Tse, a property analyst at Morgan Stanley bank in Hong Kong.

Research on major cities suggests price rises are milder elsewhere, perhaps even falling in Beijing.

Nonetheless, the state has ordered a nationwide six month freeze on land auctions, a slow down on urban relocation projects - the source of a quarter of new housing - and credit checks on developers. New stock remains plentiful so prices should stabilise.

The aim is to clean up an industry linked with money laundering and speculators (often state enterprises) who see instant wealth in luxury property.

The purge's intended victims are developers not buyers, but poorer people may find new homes delayed, while middle class investors with Shanghai buy-to-lets may see values drop.

But only if the strictures are obeyed. "Sometimes the government will try to introduce these regulations, but the banks aren't really taking heed," says Reed Hatcher, a researcher at lettings firm Debenham Tie Leung in Shanghai.

Dodgy decorators

Buying property is quick if you have the money, and perhaps even if you do not, in China's under-regulated market.

But decorating can take months as hapless buyers struggle to embellish an empty shell. Most apartments are brand new, frequently sold off-plan, and handed over without kitchens or bathrooms.


Journalist Lucy Xu and her husband, have been decorating their new Beijing flat for four months.

Like most people, she has hired a designer. Typically, his fee did not include materials, which Lucy has to shop for: "He's not doing a lot for me", she moans.

Along with supervising the ex-farm workers who turn their hand to decorating in China's big cities, decorating is consuming all her spare time.

As well as a designer, Mr Yang hired a foreman, who has in turn taken on roughly 30 workmen. But Mr Yang still spends over two hours a day on site or shopping.

2 bedroom Beijing flat, 82 square metres
Price: 820,000 yuan ($99,000; 54,000)
Decorating budget: 86,500 yuan ($10,400; 5,600)
Monthly payment: 40% of joint income
60% deposit

Beijing teacher Jin Jiwen says she had "a horrible time" with her last flat, and has now paid extra to buy somewhere fully finished, the latest rarity.

As in every gold rush, scams are widespread.

When Mr Yang first took possession of his new apartment it smelt so bad that he left it empty for a year and stripped off all the paintwork he had already paid for as "I suspected that the building material might be toxic".

He saw no point in getting the work inspected, however, because "I didn't think I'd believe what people say after I'd paid them".

Easy credit

Dubious practices are rife in the mortgage market too.

Lucy says: "I think they have a co-operation between the bank and real estate developer. They tell me you can only get the loan from this bank." Since rates hardly vary, she had little reason to shop around.

The property firm got her to use their lawyers too. "We paid the fee to this law firm, and they arrange everything".

4-bedroom Kunming flat, 148 square metres, plus garage
Price: 350,000 yuan ($42,200; 22,800)
Decorating budget: 100,000 yuan ($12,700; 6,500 )
Monthly payment: 1,300 yuan ($157; 85)
42% deposit

For Mr Yang too, "the bank was appointed by the real estate company". After he paid a hefty deposit, more than 40% of the purchase price, there were "no more questions". The bank did not even ask for proof of salary.

China's mortgage market is only half a dozen years old. Home buyers are niave about the misery interest rate swings can bring.

Banking officials have warned that rates may have to rise if inflation tips 5%.

But few buyers make the calculation, preferring to believe that Beijing's efforts to preserve a feel-good economy will make it wary of rate rises.

"They will be cautious because it's a concern to everyone," says Lucy, who thinks a rate rise would exempt home loans, though property analyst Mr Tse says there has been no such policy promise.

Mr Yang believes rates are more likely to go down than up because policy makers have talked of ensuring "a soft-landing".

China's rulers are certainly mindful of the need to make sure that medicine for feverish growth does not sour the hopes of ordinary Chinese for a better life and are busily seeking other ways to cool the economy.

They are trying to prompt a more market-oriented approach to lending by China's banks. The mortgage sector shows there is a long way to go.

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