Prices of residential housing in China may shrink by as much as 50 percent in the next 10 years, a top property researcher has predicted.

"House prices in big and medium-sized cities may collapse at any time, and insurance funds should avoid entering this sector unless housing prices are adjusted," said Ling Xiuli, a senior researcher with PICC Asset Management Company Ltd, at a seminar in Tsinghua University last week.

Ling believes that it looks gloomy for insurers investing in the real estate market at present, as "the house price to income ratio in China is unprecedentedly high in world economic history, and the housing price bubble has hit its peak."

She took Beijing as example for her argument. Statistics show that disposable income per family in Beijing last year was 66,000 yuan (US$9,637.71), while the average price for houses within the fourth ring road came to 18,400 yuan per square meter.

Even the ratio for houses out of the sixth ring road exceeded the warning level of international house price to income ratio, which, according to the UN and the World Bank, should be within 3 to 6. The ratio in Beijing not only surpassed that of Japan in 1991, but also that of the US in 1929. Worse still, it was above the level of Hong Kong in 1997 and that of the US before the sub-prime mortgage crisis.

"The house prices could plummet to an appalling level, beyond forecasts of many institutions", she said, adding that "it is quite possible that house prices in China may dive by 50 percent, drawing from the general rule in the 'housing bubbles' bursting in world economic history."

Lin's forecast may dampen property developers' hopes, but Martin Senn, Chief Investment Officer of Zurich Financial Services Group, said Lin's views were "too pessimistic".

"Considering China's overall economic environment, the real estate market would not drop to that extent. Anyway, it is necessary for insurers to diversify risks to minimize losses", he said.

Lin said if China's housing prices fell at a fast pace to meet the real value, that would be right time for insurers to invest in the real estate market.

A report released earlier by DTZ Debenham Tie Leung Ltd, a global real estate advisory organization, showed that the real estate market faces a funding gap of 300 billion yuan.

The draft insurance law now being amended should relieve the real estate sector, by allowing insurers to step into the industry.

(China Daily September 28, 2008)