SHANGHAI — When Chinese Premier Wen Jiabao warned during the recent National People's Congress of "chaos in the market" from China's sky-high home prices, he put to rest speculation that the government might soon end the tight controls it's imposed on the country's real estate market.
The cost of homes in China's major cities has risen tenfold in the last decade and doubled in the last three years as the country's breakneck growth has generated huge incomes for a fortunate few. Speculative home buying by the rich has helped push prices ever higher, making it impossible for many average people to purchase their first homes. Fears of a U.S.-like real estate bubble are often voiced.
Prices climbed so fast that many of the newly rich didn't even bother to rent out the investment properties they'd bought. They simply held on to them, secure in the knowledge that the properties will be worth more next year.
That confidence, however, has been shaken since prices hit a peak in August and began falling, a result of measures the central government first put into place in April 2010 and tightened at the beginning of 2011. They included higher down payment requirements (30 percent for first-time buyers and 60 percent for second-home buyers), the prohibition of mortgages for buyers who already own at least two houses, higher interest rates, and limitations on how many loans a bank can make.
Never miss a local story.
The result has been gently falling home prices, which dropped for the sixth straight month in February. Prices fell an average of 0.3 percent from January in 100 major cities, the largest monthly drop since September, a survey by the China Index Academy showed.
"The price will continue to fall in the short term, as long as the strict government policy remains in place," said Xue Jian Xiong, an analyst at China Real Estate Information Corp. "But it is very close to the bottom."
Xue noted that strong demand and rising costs of raw materials eventually will send prices rising anew.
"Once the policy is relaxed, house prices will show obvious growth again," he said. "Because half of the 1.3 billion people have moved into cities to join in China's urbanization, they will need somewhere to live."
The pent-up demand comes from China's rising middle class, fewer than half of whom own their own apartments.
That demand was on display last weekend at the Shanghai Exhibition Center, where big crowds scoured the offerings of hundreds of developers, enticed by sophisticated scale models of new high-rise developments and young workers eagerly handing out slick brochures. It was nothing like the empty model homes and vacant lots that have become the symbols of the American housing collapse.
Typical among those interested were Wang Mu Liang and Deng Yu Jing, who were married three months ago. The couple, both 29, are looking for an apartment in the Pudong area of Shanghai, where he works as an engineer earning 10,000 yuan ($1,580) a month. Deng works in the office of a bank and earns about the same amount. They live with Wang's parents — a typical arrangement for newlyweds in China.
"We want to have a house that belongs to us," Wang said.
The couple specified that they're willing to spend the equivalent of about $290 per square foot for an apartment and are looking for something between 650 and 1,000 square feet. After putting 30 percent down, they're hoping to take out a mortgage of about $127,000.
Asked about widespread predictions that prices will fall, Wang admitted that "we would like to wait" — seemingly a good strategy.
But there are plenty of skeptics who don't think the government is serious about lowering prices and don't believe the numbers.
"I don't think the price will fall by even 10 percent," said Song Yi, who shares a rental apartment in Shanghai, paying 1,200 yuan (about $190) a month. "The answer is simple: It's China. There are so many factors that are involved. You know how many Communist Party members are in the real estate market directly or indirectly? They will try all they can to protect their interest."
"Don't believe those numbers provided by the government," she added. "They are fake."
Despite the high prices, most Chinese remain interested in buying a home, seeing home ownership as the only safe way to invest in China.
In a recent survey of Shanghai residents by Soufun.com, the nation's top real estate website, more than half of those polled said they plan to buy a house in the next year. Another 22 percent cited a timetable of one to two years. But only 10 percent said they would aim to buy in Shanghai's exorbitantly priced downtown area, where prices have topped $1,400 per square foot in some developments.
The central government's clampdown has bitten enough, however, to cause serious budget problems for the nation's local governments, which have come to rely on land sales and developer fees for 30 percent to 50 percent of their revenues. Some, such as Foshan in the southern province of Guangdong, recently announced measures to skirt the central government's restrictions, then were forced to back down just hours later when confronted by Beijing.
"Tensions are rising between cash-strapped local governments that want to pump up the market and a central government determined to preserve social stability by keeping a lid on housing costs," Rosealea Yao, an economist at Beijing consultancy GK Dragonomics, recently told Reuters.
Beyond that, a nagging fear persists that any significant pullback in China's real estate market could seriously hurt the overall economy. Experts point out that despite all the talk of a bubble, there isn't much likelihood of a U.S.-style housing crash. The biggest reason is that the Chinese are far less leveraged than their American counterparts. No-down loans, low-interest financing and inadequate checks on customers' ability to pay led to millions of foreclosures in the U.S.
But in China, the numbers tell a different story. In 2010, 4.4 trillion yuan worth of homes were sold in China (about $697 billion). But the total value of mortgages was only 1.4 trillion yuan, according to a November report from JP Morgan assessing China's residential market. Thus, analysts, say, the odds of people defaulting in China are very low even should prices fall by 30 percent.
Still, Premier Wen issued a stern warning at the close of the annual National Party Congress.
"We can't ease property-control measures," he said. "Otherwise, it will wipe out all our previous efforts and may cause chaos in the market ... even drag down the entire economy."
(Melnicoe is a McClatchy special correspondent.)
MORE FROM MCCLATCHY
Follow McClatchy on Twitter.