The Chinese official statistics say that the average rise in property prices was 10.7 per cent in February. The increase is accelerating from a year-on-year rise of 9.5 per cent in January. However, the data may significantly underestimate what is going on for prime properties in China. My friends in Shanghai and Beijing say the rate of price increases of typical housing units is above 50 per cent a year and may reach 100 per cent, and that new property developments are spreading fast from first to second-tier suburbs, with less convenient transportation.
According to the official statistics, the rate of price increases of newly-built residential buildings (at 90 square metres and below) in Beijing, Shanghai and Shenzhen are 19.3 per cent, 11.6 per cent and 19.6 per cent, respectively. In the same category, the highest property inflation was in Sanya, Hainan Island, at 57.9 per cent. However, the location and quality of the buildings are most likely not controlled for in the official statistics. (Beyond “average prices”, no detailed description is available.) Suppose that the market has more buildings in the second-tier than the first-tier suburbs; then the average price may be lower than the location-controlled index. Official statistics most likely underestimate the size of the housing bubble.
In real estate economics, the quality-adjusted property price index can be constructed by the sampling of repeated-sale (identical) properties (like the Case-Shiller index), by running a hedonic regression (in many academic studies for particular cities), or by using expert appraisal (like the frequently quoted Japanese land price index). Having a quality-adjusted property price index is a critical base for timely policy decisions.