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--China Small City House Prices Jump As Speculation Cash Arrives
--Speculation Moves From Big to Small Cities Due Regulation 
     BEIJING (MNI) - Bengbu, a relatively unknown small city in eastern Chinese
province of Anhui, has attracted much attention because the growth rate of its
housing prices has been one of the highest nationally for the past four months. 
     What is happening in the housing market of this small city is a microcosm
of what many of China's smaller Tier-3 and Tier-4 cities are experiencing. It
provides insight into the outlook for the China's overall property market, a key
element of overall economic prospects.
     In an effort to combat soaring prices, most larger Tier-1 and Tier-2 cities
have imposed tough restrictions on housing purchases and new mortgages. This has
caused speculative activity to shift from these cities to smaller communities on
their periphery that have not yet imposed such restrictions. 
     This has led to a stampede of interest in property in smaller cities such
as Bengbu. 
     A single auction of two parcels of residential land in Bengbu in mid-August
lasted more than five hours, as buyers bid against one another more than 700
times. The starting price was more than CNY1 billion (about $152 million) and
was won with a bid of CNY2.065 billion (about $315 million), an auction
participant told MNI. More than nine property companies participated, with the
whole room of 100 seats crammed full of property developers and reporters, the
source said.
     "As far as I now, the three property developers that remained active in the
auction to the end all applied to their headquarters to bid a higher price than
the original maximum prices they had set," Mr. Li, a southeastern Anhui native
who works for land acquisition and investment for a property company in Bengbu,
said in an interview with MNI. "It's been so long since the last time Bengbu had
such a land auction and it's the largest 'land auction feast'."
     Indeed, in a medium-sized Chinese city with a population of about 3.8
million in August and GDP of CNY138.58 billion in 2016, such the land auction
results seem astonishing, not least because it's not seen as a preferring
destination for immigrants, with citizens tending to move to bigger cities,
local sources told MNI.
     But the auction scene reflects the current sizzling property market in
smaller Chinese cities, which many see as the most important change in the
Chinese property sector this year. 
     In October last year and again in March this year, the Chinese government
announced tightening policies to rein in frenzied speculation and skyrocketing
housing prices, with the controls strictest in Tier-1 and Tier-2 cities. Like
some other Tier-3 and Tier-4 cities, especially those close to large
metropolitan areas, Bengbu's ranking in terms of housing price growth rose
rapidly. 
     "Housing prices in Bengbu actually started to rise last year due to demand
for better houses and for investment" by local buyers, He Dandan, a Bengbu
native who works in the property sector in Shanghai, told MNI. "But this round
of demand is likely driven mostly by (outside) investors' speculation. Usually
investors came later, they won't come until they've seen obvious price growth."
     Bengbu's housing price growth rate stood at 0.3% on a month-on-month basis
in March, ranking it 49th among cities nationally, according to MNI calculations
based on data from the National Bureau of Statistics. But by April its ranking
had skyrocketed to second in the nation, with a month-on-month rise of 2.2%,
rising to first in the rankings in May at 3.4%. Though the m/m growth rate has
since dipped to 2.1% in June (third highest in the nation) and 1.2% in July
(sixth), the city's housing prices have continued to rise rapidly. 
     On a yearly basis, Bengbu's housing price growth rate is now one of the
highest in the nation, rising from the 26th in March, with annual price growth
of 9.20%, to fourth in July, with a 17% growth rate.
     "Actually, Bengbu's situation is not special among Tier-3 and Tier-4
cities," Mr. Li told MNI. "Rather, it's a miniature reflection" of what small
cities all over the nation are experiencing. 
     However, though the growth rate of housing prices in Bengbu is among the
highest in the nation, the actual level of prices is still relatively low
compared with other more developed cities or even cities with similar size of
populations and economies.
     "Compared with Shanghai and Beijing, the housing market in Bengbu is much
healthier," said He.
     The average housing price in Bengbu is CNY6,328 per square meter in August,
up 22.8% from CNY5,153 in December last year, according to Anjuke, one of the
major websites providing property information in China. Housing prices have
continued their upward climb since December. 
     But Bengbu prices are only a fraction of those in Shanghai, which stood at
CNY50,796 psm in September, and in Beijing, where they were CNY57,862, data from
Aujuke show.
     "No property market in China is reasonable," He Dandan, a former veteran
property reporter, told MNI. 
     The climb in housing prices in Tier-3 and Tier-4 cities was "inevitable"
given the lack of tightening in these cities and the government's encouragement
of shanty-down renovation, He said. "The government is actually supporting (the
property market in) Tier-3 and Tier-4 cities. Money from the both the private
sector and the government is flowing into these cities."
     The government program to renovate shanty-town housing is an
underappreciated reason for the robust growth of small city property markets.
Some analysts predict it has helped drive the area of housing sold in China by a
double-digit percentage. 
     Shanty-town renovation is a program under which the government tears down
dangerous and low-quality housing units and sell the land to developers on the
condition they build better housing units. Local governments pay back the
original residents with either cash, other property units in their existing
inventory, or a house in the same area after it's built.
     Anhui Province, where Bengbu is located, has been one of most involved
participants in the shanty-town renovation initiative. 
     Most housing demand in Tier-3 and Tier-4 cities comes from farmers who have
moved into the cities, strong demand from residents in shanty-town renovation
areas, and "improvement demand" -- families wanting bigger or better houses as
their families and income grow, Yan Yuejin, director of the research department
at E-house, a property information and service provider based in Shanghai, said
in an interview with MNI.
     "Bengbu's property market is also influenced by Hefei," Yan noted, as
excessive demand spills over from the bigger city to the smaller.
     Hefei, the capital of Anhui province and a Tier-2 city, grabbed headlines
last year for topping the 2016 Hurun Global House Price Index ranking compiled
by Hurun Report Inc. Hefei housing prices posted the fastest growth in the world
last year at a rate of more than 40%, as speculators pouring into the city. 
     As a result, the Hefei government started clamping down on speculation last
October by increasing land supply available for residential development,
implementing purchase quotas and strengthening management of registrations and
required filings for commercial housing projects. At the end of November, Hefei
started to limit prices of land in an effort to help cool the market. 
     But a source in Hefei told MNI the property sector there is still quite
strong.
     "In fact, (the property market in) Hefei has not cooled down, but you are
not in Hefei so you can't see it," Cai Xu, a property reporter in Hefei, told
MNI. Current property sales data are inaccurate because the government has
delayed filing records on around 7,000 to 8,000 home purchases for which the
buyers have already paid their down payments.
     "Especially for some high-priced property projects, it takes around six
months to be listed in the government records," Cai said.
     In China, a house legally belongs to the home purchaser only when the
purchase documents are included in the government filing system.  
     "Housing sales and price growth in Bengbu was mainly due to demand
spillover from Hefei after the home purchase quota policy started in Heifei,"
Cai said, noting there are many similar situations in China between larger and
smaller cities. 
     Bengbu is less than two-hour drive or a 50-minute high-speed train ride
from Hefei.
     Shen Zuoxuan, who bought a house in Bengbu because he works in Bengbu and
is originally from Xuanchen, in the southeastern part of Anhui Province, said
housing price in Bengbu has been driven higher by speculators from Hefei.
     He said the value of his house is now double its price he paid when he
purchased it in April, though its CNY6,000 per square meter price is still much
lower than in bigger cities.
     No matter how much speculation exists, however, the Bengbu housing market
has heated up rapidly. Analysts and experts project China's property sales will
continue to be driven by Tier-3 and Tier-4 cities in the second half of the
year, so these cities may face increasing demand for government restrictions to
keep prices from getting further out of control. 
--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com
--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com
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