China's Property Fever

Looking for an apartment in Shanghai today is a dispiriting reminder of what you should have bought back when everything was cheap. A three-bedroom apartment in The Summit—a stylish, but hardly palatial, development in the popular French Concession—is now on the market for $695,000, about twice what it would have cost two years ago. Another developer has raised its prices in the downtown area by more than 40% since November. Still, many investors feel compelled to buy. "They don't want to miss the boat," says Albert Lau, managing director of Savills Property Services in Shanghai, who describes the past two months as a time of "impulsive, panic buying."

Afraid that this speculative fever is getting out of hand, China's central bank last week raised the interest rate on five-year mortgages to 5.51% and urged lenders to ratchet up the down payment they require from 20% to 30% in the most heated markets. This came just days after the announcement that investors will be hit with a capital-gains tax of 5% if they sell their Shanghai homes within a year of purchasing them. These measures were hardly severe, but Beijing's message to speculators was clear: cool it.

The conventional wisdom is that the price gains might slow, at least for a while, but that only tougher measures will truly strangle speculation. Andy Xie, Morgan Stanley's resident property bear, suggested that a 50% capital-gains tax for short-term buyers might do the trick. In the meantime, the bullish mood in Shanghai and other booming Chinese cities is "just phenomenal," says Anton Eilers, regional residential director at property firm Colliers International. "Putting a couple of small rocks on the track isn't going to stop the train."