One of China's Wildest Housing Markets Is Broken

(Bloomberg) -- In the tropical Chinese island of Hainan, property prices appear to have been running wild.

The cost of new homes in the two biggest cities, Sanya and Haikou, rose 21 percent in August from the same period a year ago, statistics bureau data released Saturday showed. Those were the biggest annual gains of 70 cities monitored by the government.

But transactions since January have plummeted, and month-on-month data show that price gains have been moderating after curbs effectively ring-fenced the island from speculative money.

“We can ignore so-called price data from Hainan,” Nicole Wong, the regional head of property research at CLSA Ltd. in Hong Kong, said ahead of the release. “There is no real market price.” Wong described it as a market “on hold.”

One of China's Wildest Housing Markets Is Broken

“China’s Hawaii” cracked down this year to avoid another boom-bust cycle in an island famous for them. President Xi Jinping had pledged in April to develop Hainan as a free trade zone, with investors eyeing a potential loosening of restrictions on gambling, and local officials seeking to emulate the likes of Bangkok or Spain’s Majorca in drawing foreign tourists.

The government’s month-on-month data for the two cities showed a 0.1 percent increase in Sanya and a 0.9 percent gain in Haikou. That contrasted with the latest numbers for 70 Chinese cities, which indicated month-on-month prices were rising at the fastest pace in almost two years, led by smaller cities.

Prices rose by a record in so-called third-tier cities, according to Bloomberg calculations based on official data going back to 2009.

Tough restrictions rolled out on the island -- which is located off China’s southern coast, across the water from Vietnam -- have included lengthy residency requirements, bans on flipping property, and down payments as high as 70 percent.

Government controls twist the shape of property markets all across China. Prices in Beijing, Shanghai, Shenzhen and Guangzhou are all “pretty badly distorted” because of government caps on developers’ prices that make new homes cheaper than old ones, according to Wong.

Haibin Zhu, the chief China economist at JPMorgan Chase & Co., said last week that his biggest worry for the housing sector was the diminished role of market forces in pricing and sales as the government’s temporary administrative controls became permanent.

One of China's Wildest Housing Markets Is Broken

©2018 Bloomberg L.P.