By staff reporter Zhao Jianfei

Cover story part 2: Upscale Flats and 'Weathervane' Shanghai
Cover story part 3: Under the Veneer of a 'Prime' Land Market
Cover story part 4: Peaks, Valley for Shenzhen Property Market

(Caijing Magazine) China's property market enjoyed a welcome warm spell around China's Spring Festival period, as sales volumes started rising again from a 2007-'08 slump.

Industry insiders were generally cautious. Seeking stronger signs before declaring a rebound, they kept eyes fixed on several indicators – not volume alone – to determine whether the downward adjustment was really over.

A genuine market rebound requires higher land transaction and developer investment figures, in addition to higher sales volumes, said China Real Estate Chamber of Commerce President Nie Meisheng.

Eventually, those cautious insiders got what they were looking for – and a lot sooner than expected. Housing prices in 70 major to medium-sized cities nationwide started rising in March after falling for several months, while the volume of real estate sales rose to a new record.

Prices and transaction volumes have continued rising since, and speculators have re-entered the property market after more than a year on the sidelines.

What triggered the rebound? One factor was increased investment encouraged by the Chinese government's loose credit policy. Capital started flowing again into real estate, even while the real economy sputtered, with cash from bank loans being directed into stock and property market investments.

Hard lessons learned during China's previous adjustments are still fresh for many market players. Nevertheless, the latest wave of investor enthusiasm is unlikely to be curbed.

So as investment demand has re-emerged, "prime" land sites around China have been snapped up at record-high prices. The brief market spring led to hot summer for the property market that continues today.

The market downturn that began in October 2007 was the deepest and most influential since housing reform began in 1998. Housing prices had been soaring for a decade, so when the slump hit, developers such as Hengda Real Estate Group and Greentown Group with major properties – those worth more than 10 billion yuan -- found themselves trapped and sometimes on the brink of financial collapse.

Throughout the "golden" decade that ended in 2008, sales in September and October were especially strong. The trend snapped last autumn, when major players in real estate, investment and banking told Caijing they were pessimistic about the coming year.

Obviously, they were wrong. Shen Minggao, Caijing chief economist, said one reason was that the government simply could not afford an extended market downturn. An investment-led economic growth model had made the government highly dependent on real estate investment.

With that in mind, Shen said, the government's loose monetary policy stimulated a quick rebound for the market. And investors responded in kind, as real estate remains Chinese's most important defensive investment vehicle.

Now the summer heat is creating a bubble – a price bubble in China's real estate sector not unlike the market bubble that formed on the back of excessive liquidity before the 2007 snap. Risks for government agencies, developers and investors are building again, and the bigger the bubble, the bigger the pop.

Even the most optimistic observers now recognize that the government's unrelenting demand for an 8 percent GDP growth rate and "stability" in 2009 means the loose credit policy will be around for awhile, even though policy details may be adjusted slightly.

No one knows exactly when or how an adjustment might be made. But smart money appears to be betting on fine-tuning sometime between October and the first half of 2010.

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