GUANGZHOU, China -- The more China tries to rein in its roaring housing market, the more obsessed people get about buying.
In February, with this southern megalopolis in the throes of a property frenzy, state banks raised mortgage rates. Then came higher down-payment rules for second homes and limits on owning multiple apartments.
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The result: Prices in Guangzhou continue to climb, and the market one town over has heated up.
Pei Zhiyong, a 56-year-old advertising executive, was barred by the new restrictions from buying a third apartment in Guangzhou. One Sunday in April, he drove his BMW SUV to Foshan, an hour away, to check out a new riverfront high-rise. He figures it's the ideal time to buy.
"The harder the government tries to control the market, the more prices will rise," Mr. Pei said.
With each new policy intended to restrict home purchases, buyers are piling in. Stressed about the prospect of being left behind, many are borrowing heavily, believing prices will continue to rise despite the restrictions and will soar if the government has to lift restrictions to spur economic growth.
Another article of faith is that the Communist Party won't allow housing prices to collapse. "The government will spare no effort to make sure there are no big swings in the property market," says Ni Pengfei, a housing expert at the Chinese Academy of Social Sciences, a government think tank.
The desperate home buyers are exposing Beijing's inability to control a housing market it has been relying on for economic growth. A decade ago, the real-estate sector, including construction and home furnishings, accounted for about 10% of China's gross domestic product, according to Moody's Investors Service. It now accounts for almost one-third, reflecting both a dearth of other investment options and the petering out of manufacturing growth.
With Chinese companies staggering under debt levels pegged by UBS analysts 164% of GDP, the government has turned to less-indebted corners of the economy to keep growth going.
At one time, low levels of household debt reassured government officials and economists that a property slump wouldn't trigger a wider financial crisis. But the property-buying binge has changed that equation. Long-term household loans, mostly mortgages, now account for one-third of all new bank loans. Household debt stands at more than 42% of GDP, according to Moody's. That ratio has grown 9 percentage points in three years and now surpasses levels in China's emerging-market peers including Brazil, Mexico, Turkey and Russia. In the U.S., that ratio hit about 85% during the housing crisis.
Policy makers want to prevent the property bubble from getting worse, worried that any collapse could send defaults cascading through the banking system, infecting the overall economy perhaps for years to come. On the other hand, they are concerned that an investment slowdown could hamper growth. Economists already are warning that the recent property controls are starting to cause developers to scale back on new projects, potentially denting growth later this year.
"Lessons from Japan and the U.S. told us that there is no such thing as an ever-rising market," says Li Xunlei, chief economist at Chinese brokerage Zhongtai Securities.
Frothy as prices have been, China's housing market isn't vulnerable to a full-blown property downturn like the one in the U.S. a decade ago, economists say. Chinese home buyers often are required to put at least 30% down. Because Chinese banks only have a limited ability to sell off loans as securities, they don't offer risky mortgages like those that triggered the U.S. housing debacle. Moreover, home-equity financing that lets owners borrow against their homes hasn't taken off in China.
In Shenzhen, the average home sells for 45 times average annual household income, compared with around 12 times for homes in New York City, according to an analysis by Zhang Ming, a senior economist at the Chinese Academy of Social Sciences.
Chinese government data show that prices across 70 Chinese cities were 9.7% higher in May than a year earlier, a larger year-over-year increase than the 9.3% last September, when the current round of housing controls were instituted.
In some big cities, the frenzy has moderated somewhat. In Shanghai, the year-over-year increase was 31% in May, compared with 50% last September. Beijing posted a 22% annual increase in May, down from 33% in April.
Halfway across China in Lanzhou, a polluted industrial hub at the edge of the Gobi Desert, the housing market is booming. Homes for sale are packed with would-be buyers, including small-business owners who think property is a better bet than shops or factories.
Prices started to take off in September, just as Beijing took its first steps to crack down. By December, Lanzhou's prices were 27% higher than a year earlier. In April, Lanzhou also cracked down with higher minimum down payments and limits on second- and third-home purchases in the city center.
"The housing market in Lanzhou is too heated," Gao Jia, deputy director of Lanzhou's housing authority, said in an April interview as he leaned back in his chair and smoked a cigarette. "The government needs to make sure the housing price is going up steadily, not too fast."
In Foshan, a city of seven million dotted with factories making refrigerators, television sets and other household appliances, home prices have risen 18% in recent months as buyers poured in after property controls were imposed in Guangzhou.
Mr. Pei, the advertising executive, was one of many Guangzhou buyers signing contracts in April for apartments at the Master Work high-rise overlooking the Desheng River in Foshan. He intended to pay for a three-bedroom apartment partly with the proceeds from a studio in Guangzhou he and his wife had just sold. He said it had gone up in price more than 50-fold since they bought it 13 years ago.
"No other investment is as profitable as property," he said. "Stocks are too risky."
One middle-aged homemaker was so eager to snag an apartment in a Foshan shopping-mall complex that she asked a broker to wait in line all night when sales started in May. "Foshan to Guangzhou is just like Brooklyn to Manhattan," she said. All 300 apartments sold out within 60 hours, according to the broker, Huang Kai.
The boom in Foshan hasn't cooled things off in Guangzhou. Sales agents for the Blessed and Colorful Apartments, a new high-rise complex in the southern part of the city, say that prices for the units have risen nearly 30% since they went on sale in January.
Zhang Ying, a 27-year-old web designer who makes about $1,500 a month, bought a two-bedroom apartment in another development in January. Her mortgage payments amount to nearly 80% of her income. "I'm essentially a slave to this property now," she says.
In some smaller cities, the property boom is helping to reduce a housing glut produced by earlier overbuilding -- a goal of the central government.
Tangshan, a heavy-manufacturing city two hours east of Beijing, had benefited from home buyers driven out by new restrictions in the capital. The estimated time it would take to clear the inventory of unsold homes declined from 38 months last November to 27 months in May.
Many buyers appear to be investors who don't intend to move to the city or work there. In late May, Tangshan authorities raised down-payment requirements to discourage speculative buying.
The housing rally in Lanzhou, the central China industrial city, also was driven by buyers from outside the area, according to Mr. Gao, the housing official.
Zhang Xiaoqi, a retired accountant, was eyeing an apartment for her son. She was prepared to put 20% down on an apartment early this year. When Lanzhou raised the down-payment requirement to 30%, she gave up.
"Originally I could afford a home, but now it's too much," she said. She contends prices shot up because of the restrictions.
A 53-year-old engineer in Lanzhou was determined to buy. "The harder it is to get something, the more you want to buy," he said while browsing apartments decorated in Old Europe style, replete with chandeliers. "I need to buy before prices go up further."
At the end of last year, real estate accounted for 68.8% of China's household assets, Moody's says. In the U.S., it is less than 60%.
Mr. Ni, the housing expert at the Chinese Academy of Social Sciences, estimates that as much as 50% of China's home sales today are for investment, a situation that worries the Communist Party leadership.
"Houses are for living in, not for speculation," President Xi Jinping said at a December meeting that set main economic goals for 2017.
Nonetheless, the government has stopped short of imposing a property tax, which would discourage people from buying homes as an investment and leaving them empty by making it more expensive to own a home. Beijing has shown little political will to force a move that would raise costs for already stretched homeowners.
Releasing more land for development is another way to take the pressure out of the property bubble. But local governments rely on land sales to fund their programs and have an incentive to sit on land as it appreciates and sell it to developers in small increments.
The new rules instituted to tame the housing frenzy in Beijing and Shanghai have angered some buyers and sellers.
On a recent weekend, hundreds of people marched down a busy Shanghai shopping street to air grievances over deals thrown into jeopardy. Videos circulating on social media showed protesters clashing with police and some being dragged away -- unrest highly unwelcome in a year of a major Communist Party conclave expected to consolidate Mr. Xi's power. Shanghai promptly eased some restrictions on developers and buyers.
Among protesters in front of Beijing's municipal hall one weekend in May was Cui Meng, a 30-year-old saleswoman. Earlier this year, she put up her apartment for sale and borrowed 900,000 yuan (about $132,000) from a friend to buy a three-bedroom home costing 4 million yuan.
After new property restrictions took effect in March, the buyer of her apartment pulled out and asked for the deposit back. Without the ability to sell her old home, Ms. Cui found herself unable to repay her friend and facing a mortgage bill representing about 65% of her and her husband's combined income. "It's too much pressure," she said.
--Pei Li contributed to this article
Write to Lingling Wei at email@example.com and Dominique Fong at Dominique.Fong@wsj.com
(END) Dow Jones Newswires
July 12, 2017 12:24 ET (16:24 GMT)