Sluggish Economy Doesn't Dampen Shanghai's Housing Prices

China's economy isn't doing too well these days, but you wouldn't know it from the government's real estate transaction center in Shanghai's Baoshan district. Hundreds of people jam the office every day to put in paperwork for homes they've just purchased. The crowds are so loud and anxious that guards wearing white hardhats and wielding bullhorns patrol the lines to keep order.

In January, home prices in Shanghai were up by more than 15 percent from a year earlier, according to China's National Bureau of Statistics. In the southern city of Shenzhen, prices have jumped by more than 50 percent in the past 12 months.

At the government's real estate transaction center in Shanghai's Baoshan district, hundreds of people show up every day to submit paperwork for homes they've just purchased.

Frank Langfitt/NPR

"Originally, I didn't plan to buy at this particular time, but now prices have forced me to," says a construction worker surnamed Zhang, 50, speaking over the din of the crowd at the transaction center. "If I don't buy now, future prices will be more unbearable."

Sitting next to him is Anna Zhang, no relation, who feels the same way. Zhang, who is 27 and works for an export company, has just bought her first home with her husband. The apartment, which is less than 600 square feet, cost the couple more than $200,000, most of which they borrowed from a bank. That's a lot of money in a city where the average annual salary is about $14,000, according to Zhaopin.com, a job recruitment portal.

Anna Zhang says she had no intention of spending so much, but had no choice.

"I would call a homeowner in the morning and he'd offer one price," she says. "When I called him back in the afternoon, there was another price. This happened twice and [the] price jumped anywhere from $7,500 to $15,000."

Home prices are rising in top-tier cities, including Beijing and Guangzhou, at a time when China's economic growth continues to slow and currency and stock prices remain down. GDP growth was 6.9 percent last year, the lowest rate in a quarter-century. The Shanghai composite has dropped by about 45 percent since its high in June.

What gives? Oliver Rui, who teaches finance at China Europe International Business School in Shanghai, says rising home prices are not a sign of confidence in the economy — but of uncertainty. Many small and midsize business owners are pouring money into Shanghai real estate because they see it as a safe haven for their capital.

"They think that the outlook of the economy is not clear," says Rui. "They don't want to further invest in their business, so the best way to hedge against inflation is real estate."

That's because, historically, real estate in top Chinese cities has been a sure bet. If you bought an apartment in downtown Shanghai in, say, the year 2000, you might have seen the value rise 10 times.

Rui, though, warns that continuing to pour money into China's real estate sector isn't good for the economy in the long run. It sidelines capital that could be better used to build a more nimble, innovative economic model that could create better jobs with higher wages.

While China's wealthiest cities are enjoying price runs, huge swaths of apartments in so-called second-, third- and fourth-tier cities in the country's interior are gathering dust. At the end of last year, there were about 182 square miles worth of unsold residential floor space, according to the Chinese government. That's more than the area of Philadelphia.

China's government has cut deed taxes and reduced down payment requirements to try to sell off some of this white-elephant inventory — but many Chinese have neither the cash nor the desire to buy in smaller cities.

"There's a concern that in the future, there will be fewer and fewer policy measures available to get people to buy this housing," said Lu Wenxi, a researcher with Centaline, a leading real estate company operating in China. "If the market weakens further, we'll eventually use up all the tools in our toolbox."

Officials in the northeastern rust-belt city of Shenyang recently considered offering college graduates housing loans with no down payment. In a culture known for thrift, this sort of subprime scheme drew howls online, and the local government put plans on hold.

"That indicates in certain areas," says Rui, "the local government is desperate."